TEXT-S&P rates DIRECTV subsidiaries' senior unsed notes 'BBB'

Thu Jan 10, 2013 1:21pm EST

Jan 10 -- Standard & Poor's Ratings Services today assigned its 'BBB' issue-level ratings to co-issuers DIRECTV Holdings LLC's and DIRECTV Financing Co. Inc.'s proposed $750 million senior unsecured notes. We expect the notes to carry a guarantee from El Segundo, Calif.-based parent direct-to-home (DTH) TV service provider DIRECTV. The ratings are based on preliminary documentation and are subject to review of final documents. Pro forma for the transaction, debt to EBITDA (including our adjustments for operating leases, pension, and postretirement benefits) was about 2.6x as of Sept. 30, 2012. Over the long term, we believe the company will operate within the 2.5x consolidated leverage parameter, while still pursuing its shareholder return strategy of using cash flow generation and proceeds from subsequent debt issuances to fund share repurchases. The 'BBB' corporate credit rating and stable outlook on parent DIRECTV remain unchanged. Based on the company's recent average 4.5% rate increase across its programming packages, we believe ARPU (average revenue per user) will increase at a mid-single digit percent rate in 2013, within the 4% to 5% range, dependent on the competitive environment and ancillary revenues. We expect very low single-digit percent subscriber growth in the U.S. in 2013. As DIRECTV's video subscriber growth slows in the U.S., and penetration of advanced services matures, revenue and ARPU growth will become increasingly dependent on rate increases, which could leave the company more vulnerable to discounted triple-play offerings from cable operators. We presume programming costs will continue to rise at a high-single-digit percent rate of around 8%, which could pressure U.S. EBITDA margins over the longer term. Still, we expect the company to maintain its consolidated EBITDA margin at the current mid-20% area over the next few years due to its focus on more profitable U.S. subscribers and growth in the higher margin Latin American operations (28.9% for the 3 months ended Sept. 30, 2012). (For the complete corporate credit rating rationale, see the summary analysis on DIRECTV, published on Aug. 9, 2012, on RatingsDirect.) RELATED CRITERIA AND RESEARCH

-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Use Of CreditWatch And Outlooks, Sept. 14, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

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