TEXT-Fitch affirms Cablevision Systems Corp
July 20 - Fitch Ratings has affirmed the 'BB-' Issuer Default Rating (IDR) assigned to Cablevision Systems Corporation (CVC) and its wholly owned subsidiary CSC Holdings LLC (CSCH). In addition, Fitch has affirmed specific issue ratings assigned to CVC and CSCH as outlined below. The Rating Outlook is Stable. As of March 31, 2012 CVC had approximately $11.1 billion of debt outstanding on a consolidated basis. Fitch believes that CVC has sufficient capacity within the current ratings to accommodate management's decision to increase capital expenditures and to refrain from increasing prices during 2012. These decisions are viewed within the context of the company's capital allocation strategy that continues to favor shareholders. The increased level of investment, while prudent from a competitive standpoint, will constrain free cash flow generation, pressure EBITDA margin and limit overall financial flexibility resulting in a weaker credit profile. However, Fitch anticipates that capital spending and operating margin will revert to levels closer to historic performance during 2013 and 2014, which will drive free cash flow generation and position the company's credit profile more in line with the current ratings. Fitch expects a modest increase of CVC's leverage metric during 2012. The decision not to increase pricing coupled with ongoing programming expense inflation will depress EBITDA margin during 2012. During the first quarter of 2012 CVC's telecommunication segment margin declined over 300 basis points to 36.3%. Fitch anticipates similar margin performance during the remainder of 2012 before margins rebound somewhat during 2013. Leverage is expected to increase to 5.3x as of the end of 2012 and strengthen below 4.9x by year-end 2013. CVC's leverage was 4.9x as of the LTM period ended March 31, 2012 which was in line with leverage as of year-end 2011. Fitch expects CVC management will maintain the company's leverage between its target of 4x to 5x. The target is somewhat more aggressive than CVC's investment grade rated cable multiple system operator peers. Fitch does not anticipate CVC will increase leverage beyond its target to support its share repurchase program. From Fitch's perspective, the focus on shareholder returns will continue during the ratings horizon as CVC is well positioned to continue generating material amounts of free cash flow (albeit lower during 2012) and considering the company is currently operating within a reasonable range of management's leverage target. CVC's board of directors authorized the repurchase of an additional $500 million of its Class A common in May 2012. Fitch believes that CVC will maintain an appropriate balance between investing in its business during 2012 and repurchasing shares. Fitch acknowledges that CVC's share repurchase authorization represents a significant potential use of cash, however Fitch believes that the company would reduce the level of share repurchases should the operating environment materially change to maximize flexibility. Free cash flow generation (defined as cash flow from operations less capital expenditures and dividends) amounted to approximately $150 million during the LTM period ended March 31, 2012. FCF was negative $28.1 million during the first quarter of 2012. After considering increased capital expenditures and EBITDA margin pressure Fitch estimates CVC's FCF generation will range between $200 and $250 million during 2012. Going forward Fitch believes FCF generation will approximate 7% of consolidated revenues. Fitch considers CVC's liquidity position and overall financial flexibility to be adequate within the current ratings. The company's liquidity position is supported by cash on hand and available borrowing capacity from CSCH's $1.2 billion revolver (expiring March 2015). Nearly $1.2 billion of borrowing capacity was available from the revolver as of March 31, 2012. CVC executed several capital market transactions during 2011 that extended its maturity profile. Going forward, Fitch expects that scheduled credit facility amortization will be repaid with existing cash while maturities of senior notes are expected to be refinanced. Scheduled maturities (excluding monetization transactions) total approximately $170 million the remainder of 2012 and nearly $810 million during 2013. Overall Fitch's affirmation of CVC's ratings incorporates the solid operating profile and competitive strength of CVC's core cable business. In Fitch's opinion the operating profile of CVC's cable segment is an industry leader and has proven to be resilient to persistent competitive pressures and weak housing and employment markets. CVC's cable business consistently produces industry leading service penetration levels, average revenue per unit (ARPU), ARPU growth rates, and operating margins in an increasingly competitive operating environment. Outside of the company adopting a more aggressive financial or acquisition strategy which is expected to remain a key rating consideration, the weakening of CVC's competitive position presents the greatest concern within the company's credit profile. The competitive pressure associated with the service overlap among the different telecommunications service providers, while intense, is not expected to materially change during the ratings horizon. Innovative service offerings such as the company's deployment of a WI-FI broadband wireless network, the introduction of a remote storage digital video recorder service, and the emergence of video over IP applications enhance the company's competitive position. These factors have translated into sustainable strong operating performance and free cash flow growth. The Stable Outlook reflects Fitch's expectation that the company's operating profile will strengthen during 2013 and 2014 producing revenue growth rates, EBITDA margins and free cash flow more in line with historical performance. Further, the Stable Outlook considers the company accommodating non-core acquisitions, and investments in a credit neutral manner and the absence of other leveraging transactions. Rating Triggers Key considerations that can lead to positive rating actions include further strengthening of the company's credit profile and reduction of leverage to levels approaching 4x while demonstrating that its operating profile will not materially decline in the face of competition and the poor housing and employment environment. Negative ratings actions would likely coincide with the company's inability to strengthen its operating profile following its decision to increase capital expenditures and not take any price increase during 2012. Specifically Fitch will be looking for mid-single digit ARPU growth, operating margins returning to the high 30% range and free cash flow generation in excess of $400 million. A management decision to increase leverage greater than 6x to repurchase shares, fund a large dividend or fund a non-core investment or acquisition in the absence of a clear path to de-lever the company to within its current leverage target will likely spur a negative rating action. Fitch has affirmed the following ratings with a Stable Outlook: Cablevision Systems Corporation --IDR at 'BB-'; --Senior Unsecured Debt at 'B-' CSC Holdings LLC --IDR at 'BB-' --Senior Secured Credit Facility at 'BB+' --Senior Unsecured Debt at 'BB'
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