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Fitch Rates Charter Communications Operating Term Loan 'BB+', CCOH Sr Notes 'BB-'; Outlook Stable
(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) Fitch Ratings has assigned a 'BB+' senior secured rating to Charter Communications Operating, LLC's (CCO) proposed seven-year, $1.2 billion term loan F. In addition Fitch has assigned a 'BB-' rating to CCO Holdings, LLC's (CCOH) $1 billion issuance of senior unsecured notes due 2024. Proceeds from the term loan, along with a draw from CCO's revolver are expected to be used for general corporate purposes including repayment of a portion of CCO's existing bank debt. Fitch anticipates proceeds from the CCOH issuance will be used to fund the redemption of CCOH's 7.875% senior notes due 2018. CCO and CCOH are indirect wholly owned subsidiaries of Charter Communications, Inc. (Charter). As of Dec. 31, 2012, Charter had approximately $12.9 billion of debt (principal value) outstanding including $3.3 billion of senior secured debt. KEY RATING DRIVERS: --The terms and conditions of term loan F are substantially similar to the existing senior secured credit facility. --The issuance is in line with Charter's strategy to simplify its debt structure and extend its maturity profile while reducing leverage to its target range of 4x to 4.5x. --Acquisition of Bresnan is neutral to Charter's ratings and will not generate meaningful cost synergies or present integration risks. --Expected improvement in Charter's credit profile likely to be delayed by Bresnan acquisition. The issuance is in line with Charter's strategy to simplify its debt structure and extend its maturity profile while reducing leverage to its target range of 4x to 4.5x. The issuance will not result in any material improvement of the company's credit profile, however, but reduces refinancing risk related to 2016 scheduled maturities. Pro forma for term loan F and prior capital market transactions, Charter's 2016 scheduled maturities are expected to be reduced to approximately $75 million from $1.6 billion as of Dec. 31, 2012. The near-term maturity schedule is very manageable as only 5.9% of outstanding debt as of Dec. 31, 2012 is scheduled to mature before 2016, including $260 million and $411 million during 2013 and 2014, respectively. Fitch's ratings incorporate Charter's pending acquisition of Bresnan Broadband Holdings, LLC for $1.625 billion in cash. Fitch anticipates the debt-funded acquisition will modestly increase Charter's leverage; however, leverage will remain within Fitch's expectations for the rating. Charter's leverage will increase to approximately 5.1x on a pro forma basis as of the latest 12-month (LTM) period ending Dec. 31, 2012, after giving consideration for the incremental debt associated with the proposed transaction and Bresnan's EBITDA generation. Actual leverage as of Dec. 31, 2012 was 4.75x. The incremental debt associated with the acquisition will slow the pace of expected improvement in Charter's credit profile during 2013. Fitch now anticipates Charter's leverage will remain close to 5x at the end of 2013 before declining somewhat to 4.6x by the end of 2014. 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, setting the foundation for sustainable growth while creating a 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. Charter generated approximately $131 million of free cash flow during the year-ended 2012, down markedly from the $426 million of free cash flow produced during the year-ended 2011. Charter's more viable capital structure has positioned the company to generate positive free cash flow. However Fitch expects free cash flow generation during 2013 will suffer from the effects of lower operating margin and higher capital intensity. Capital expenditures during 2012 increased 33% relative to last year to approximately $1.8 billion, representing 23% of revenues. Fitch believes capital intensity will remain elevated during 2013 and 2014. Fitch anticipates Charter will generate between $250 million and $300 million of free cash flow during 2013 and produce between $450 million to $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 cash on hand, borrowing capacity from CCO's $1.15 billion revolver (approximately $960 million was available as of Dec. 31, 2012 and $835 million adjusted for the Bresnan acquisition) and expected free cash flow generation. Charter's revolver commitment expires on April 11, 2017. Fitch notes that Charter is in the process of increasing the size of its revolver to $1.3 billion and extending the maturity date into 2018. Charter has successfully extended its maturity profile, as only 5.9% of outstanding debt as of Dec. 31, 2012 is scheduled to mature before 2016, including $260 million and $411 million during 2013 and 2014, respectively. Previous capital market activity addressed the refinancing risk related to 2016 scheduled maturities. Pro forma for CCO Holdings, LLC issuance in February 2013, 2016 scheduled maturity is reduced to approximately $591 million from $1.6 billion as of Dec. 31, 2012. RATING SENSITIVITIES: 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. 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. Contact: Primary Analyst David Peterson Senior Director +1-312-368-3177 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst John Culver Senior Director +1-312-368-3216 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug.8, 2012); --'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 8, 2012); --'Rating Telecom Companies' (Aug. 9, 2012). Applicable Criteria and Related Research Rating Telecom Companies here Parent and Subsidiary Rating Linkage here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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