TEXT - Fitch affirms Charter Communications Operating LLC
Dec 6 - Fitch Ratings has affirmed the 'BB-' Issuer Default Rating (IDR) assigned to CCO Holdings, LLC (CCOH) and Charter Communications Operating, LLC (CCO). Each of CCOH and CCO are indirect wholly owned subsidiaries of Charter Communications, Inc. (Charter). Fitch has also affirmed the specific issue ratings assigned to Charter's various subsidiaries as outlined below. The Rating Outlook for all of Charter's ratings is Stable. Approximately $13.7 billion of debt (principal value) outstanding as of Sept. 30, 2012 is affected by Fitch's action. Fitch believes that Charter has sufficient capacity within the current ratings to accommodate changes to the company's operating strategy and plans to maintain a higher level of capital expenditures (relative to historical norms and peer comparisons). In Fitch's opinion the strategy shift along with higher level of capital expenditures will lead to a stronger overall competitive position. The changes to Charter's operating strategy support the company's overall strategic objectives, set the foundation for sustainable growth while creating more efficient operating profile. However Fitch expects the strategy will hinder free cash flow generation and strain EBITDA margins during 2013 limiting overall financial flexibility and slowing the company's progress to achieving its leverage target. During the short term Fitch believes that customer connections, revenue and expense metrics will be negatively impacted. Fitch anticipates that capital spending will range between 20% to 22% of revenues during the ratings horizon. A significant portion of the company's capital expenditures will be success- based in support of the company's all-digital initiative. The company's capital intensity is expected to be among the highest within the larger cable multiple system operators. Increased operating and selling expenses supporting the company's transition to its new selling and operating strategies will lead to EBITDA margin erosion. Charter's EBITDA margin was 36.1% during the last 12 month period ending Sept. 30, 2012. Fitch expects margins to decline by up to 100 basis points during 2013 before rebounding somewhat during 2014. The stronger margins along with moderating capital intensity are expected to spur free cash flow growth and strengthen the company's credit profile. Charter's capital structure and financial strategy remain relatively consistent and centers on simplifying its debt structure, extending its maturity profile while reducing leverage to its target range of 4x to 4.5x. The company's debt structure continues to evolve into a more traditional hold-co/op-co structure, with senior unsecured debt issued by CCOH and senior secured debt issued by CCO. Charter has eliminated the second lien tier of the company's debt structure during 2012 and has redeemed the high-yield debt issued by CCH II. Leverage remains outside the company's target at 5.1x for the LTM period ended Sept. 30, 2012 and 4.9x pro forma for the $678 million redemption of CCH II's 13.5% senior notes due 2016. Fitch anticipates Charter's leverage will decline to 4.75x by the end of 2013 and 4.25x by year-end 2014. Charter's more viable capital structure has positioned the company to generate positive free cash flow. However Fitch expects free cash flow generation during 2012 and 2013 will suffer from the effects of lower operating margin and higher capital intensity. Charter generated approximately $193 million of free cash flow during the LTM period ended Sept. 30, 2012 down markedly from the $426 million of free cash flow produced during the year-ended 2011. Fitch anticipates Charter will generate between $250 and $300 million of free cash flow during 2013 and produce over $500 million during 2014 when stronger margins return. Rating concerns center on Charter's elevated financial leverage (relative to other large cable MSOs), a comparatively weaker subscriber clustering and operating profile. Moreover, Charter's ability to adapt to the evolving operating environment while maintaining its relative competitive position given the challenging competitive environment and weak housing and employment trends remains a key consideration. Charter's liquidity position is adequate given the current rating and is supported by $868 million of cash on hand as of Sept. 30, 2012 (Fitch notes that $768 million of cash was used to fund the partial redemption of CCH II senior notes in October 2012), borrowing capacity from CCO's $1.15 billion revolver (all of which was available as of Sept. 30, 2012) and expected free cash flow generation. Fitch notes that amounts available for borrowing under CCO's revolver was approximately $715 million after giving effect for the redemption of the remaining $468 million of CCH II's senior notes in November 2012. Charter has successfully extended its maturity profile as only 5.8% of outstanding debt as of Sept. 30, 2012 is scheduled to mature before 2016, including $8 million, $267 million and $418 million during the remainder of 2012, 2013 and 2014 respectively. Fitch anticipates that a large portion of near term maturities will retired with current cash and future free cash flow generation. Refinancing risk elevates during 2016 when approximately $2.3 billion of bank debt is scheduled to mature. What Could Trigger a Positive Rating Action --Positive rating actions would be contemplated as leverage declines below 4.5x; --The company demonstrates progress in closing gaps relative to its industry peers on service penetration rates and strategic bandwidth initiatives. --Operating profile strengthens as the company captures sustainable revenue and cash flow growth envisioned when implementing the current operating strategy. What Could Trigger a Negative Rating Action --Fitch believes negative rating actions would likely coincide with a leveraging transaction that increases leverage beyond 5.5x in the absence of a credible deleveraging plan; --Adoption of a more aggressive financial strategy; --A perceived weakening of Charter's competitive position or failure of the current operating strategy to produce sustainable revenue and cash flow growth along with strengthening operating margins. Fitch has affirmed the following ratings with a Stable Outlook: CCO Holdings, LLC --IDR at 'BB-'; --Senior secured term loan at 'BB+'; --Senior unsecured debt at 'BB-'. Charter Communications Operating, LLC --IDR at 'BB-'; --Senior secured credit facility at 'BB+'. Fitch has withdrawn the following ratings: CCH II, LLC --IDR at 'BB-'; --Senior unsecured debt at 'B+'.
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