TEXT - Fitch affirms DIRECTV Holdings LLC
Nov 21 - Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) assigned to DIRECTV Holdings LLC (DTVH). Fitch has also affirmed specific issue ratings assigned to DTVH as outlined at the end of this press release. DTVH is a wholly owned indirect subsidiary of DIRECTV. As of Sept. 30, 2012 DTVH had approximately $17.2 billion of debt outstanding. DIRECTV's financial strategy remains consistent and is focused on returning capital to its shareholders in the form of share repurchases and maintaining a 2.5x long-term leverage target. Consolidated credit protection metrics are aligned with Fitch's expectations and the current rating category. In line with the company's financial strategy, total debt outstanding as of Sept. 30, 2012 increased 27.5% relative to year end 2011 to approximately $17.2 billion. Consolidated leverage increased to 2.29x as of the LTM period ended September 30, 2012 when compared to 1.90x as of year-end 2011 and 1.93x as of the LTM period ended Sept. 30, 2011. Proceeds from incremental debt issuance have been used to fund share repurchases at DIRECTV. Through the first nine months of 2012 DIRECTV has repurchased 82 million of its shares for $3.9 billion. As of Sept. 30, 2012 approximately $3.0 billion of capacity remains on the current share repurchase authorization. Overall the ratings for DTVH reflect the size, scale and strong competitive position of DTVH's operations as the second largest multi-channel video programming distributor (MVPD) in the United States with nearly 20 million video subscribers as of Sept. 30, 2012, and the growth prospects of DIRECTV's Latin American (DTVLA) business segment. Additionally the ratings incorporate Fitch's expectation for continued generation of free cash flow (before dividends to DIRECTV) and the company's high level of financial flexibility within the existing ratings category. These considerations, along with the DIRECTV's 2.5x long-term leverage target, the DIRECTV guaranty and an operating strategy primarily focused on targeting high-value subscribers and controlling subscriber churn, strongly position the company's credit profile within the current rating. Fitch believes there is adequate flexibility within the current ratings to accommodate ongoing risks to its business including weak macro-economic trends, increasing programming costs, technology evolution and unrelenting competitive pressures. Notwithstanding its video centric service offering, DTVH has a strong competitive position. However, video services within the United States are a mature product with, in Fitch's opinion, limited revenue and subscriber growth potential. DIRECTV's operating strategy within its US business segment shifted from subscriber growth to balancing subscriber volume growth with profitability. Core to the operating strategy is a more discipline approach to new subscriber acquisition recognizing slower subscriber growth on the horizon and a more rational and sustainable pricing and promotion structure. Ratings concerns center on DTVH's ability to adapt to the evolving competitive landscape and weak economic and housing formation conditions. Ratings also factor the company's lack of revenue diversity and narrow product offering relative to its cable MSO and telephone company competition. In Fitch's view DTVH's ability to innovate its video service to, among other things, establish a path to become more IP-video enabled is critical for the company to control subscriber churn and subscriber retention spending, grow video ARPU and expand operating margins. The ratings also incorporate Fitch's belief that DTVH's satellite infrastructure can put the company at a competitive disadvantage relative to its competition's respective technology and network positions as video content is increasingly consumed over alternate platforms and devices. DTVH bondholders benefit (through DIRECTV's guaranty of DTVH indebtedness) from DTVLA's size and strong competitive position as one of Latin America's largest multi-channel video service providers. DTVLA represents DIRECTV's fastest growing operating segment which generated approximately $5.9 billion of revenue and $1.8 billion of EBITDA during the LTM period ended Sept. 30, 2012. Strong subscriber growth within the segment has limited segment FCF generation (defined as cash flow from operations less capital expenditures and dividends), which amounted to approximately $44 million during the LTM period ended Sept 30, 2012 representing less than 2% of consolidated FCF. The market dynamics in Latin America, in particular a lower pay TV service penetration rate (relative to the United States) and a growing middle class position DTVLA to generate meaningful EBITDA and free cash flow growth over the ratings horizon. DTVLA operates a direct broadcast satellite business throughout Latin America and the Caribbean under the DIRECTV and SKY brands. Based on Fitch's expectation for continued FCF, Fitch believes DIRECTV's overall financial flexibility and liquidity position is strong. Fitch acknowledges that DIRECTV's share repurchase authorization represents a significant use of cash, however Fitch believes that the company has the flexibility to reduce the level of share repurchases should the operating environment materially change in order to maximize flexibility. The company generated nearly $2.5 billion of FCF during the LTM period ended Sept. 30, 2012. Fitch anticipates modest free cash flow growth driven by mid-single digit revenue growth along with stable EBITDA margins and consistent capital spending in the range of $2.5 billion annually. In addition to free cash flow generation the company's liquidity position is supported by the collective available borrowing capacity under its $2.5 billion revolver (Consisting of a $1.0 billion revolving credit facility maturing Feb. 2016 and a $1.5 billion revolver maturing Sept. 2017. As of Sept. 30, 2012 all of which was available) and $2.4 billion of cash as of Sept. 30, 2012. The company's favorable maturity schedule also adds to its overall financial flexibility. As of September 30, 2012, DTVH's next scheduled maturity is not until 2014 when $1.0 billion of senior unsecured notes will mature. DIRECTV's down-stream guaranty of DTVH's senior unsecured notes has a neutral effect on DTVH's credit profile, in Fitch's opinion. DTVH bondholders will benefit from the cash flows generated from DIRECTV's businesses owned outside of DTVH, including DIRECTV Latin America Holdings, Inc. and DIRECTV Sports Networks, LLC. However, Fitch expects DIRECTV to leverage the same cash flows to 2.5x consolidated EBITDA muting the incremental benefit of DIRECTV's guaranty. Fitch believes that DTVH will continue to be the primary issuer of unsecured debt. Future note issuances are expected to be guaranteed by DIRECTV and treated on a pari passu basis with DTVH's existing unsecured notes. DIRECTV is not restricted from issuing debt from either DIRECTV or DTVLA. Debt issued at either entity will diminish DIRECTV's guaranty and be treated as an event risk by Fitch. Additionally DIRECTV is not restricted from selling all or substantially all of its assets or merging or consolidating with other entities in contrast to other guarantors of DTVH's senior notes. The sale of assets, in particular DIRECTV's ownership stake in DTVLA, would weaken DIRECTV's guaranty and likely lead to negative rating actions. What Could Trigger a Positive Rating Action: -- Assumption of a more conservative financial strategy, in the absence of any material erosion of the operating profile of DIRECTV's U.S. business segment, that would reduce leverage to 2.0x on sustainable basis. --The growing importance of the DIRECTV's Latin American segment, in terms of revenue, EBITDA and FCF generation will lead to positive rating actions holding the operating profile of the company's US business constant. What Could Trigger a Negative Rating Action: --A change in the existing guaranty structure or a sale of DIRECTV's ownership stake in DTVLA. --Adoption of a weaker leverage target or an event such as a debt-financed dividend or leveraging transaction that increases leverage higher than 3.5x in the absence of a creditable de-leveraging plan. Fitch has affirmed the following ratings with a Stable Outlook: DIRECTV Holdings LLC --IDR at 'BBB-'; --Senior Unsecured Debt at 'BBB-'; Fitch has assigned the following ratings with a Stable Outlook --Senior Unsecured Credit Facility maturing Feb. 2016 at 'BBB-' --Senior Unsecured Credit Facility maturing Sept. 2017 at 'BBB-'
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