Feb 11 - 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.
KEY RATING DRIVERS:
--Acquisition of Bresnan Broadband Holdings, LLC (Bresnan) neutral to Charter's
--Bresnan acquisition fits strategically and will not generate meaningful cost
synergies or present integration risks;
--Expected improvement in Charter's credit profile likely delayed by Bresnan
The affirmation of Charter's ratings follows the company's announcement that it
intends to purchase 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 months (LTM) period ending Sept. 30, 2012 after giving
consideration for the incremental debt associated with the proposed transaction
and Bresnan's EBITDA generation.
Bresnan operates cable systems in Montana, Wyoming, Colorado and Utah passing
approximately 666,000 homes. The acquisition is in line with Charter's strategy
to provide service in largely secondary and rural markets. However, Bresnan's
cable service area does not complement Charter's existing service footprint so
the acquisition will not generate any meaningful operational synergies (outside
of programming cost savings) or create integration risks. From Fitch's
perspective Bresnan has a relatively strong operating profile. Bresnan's
service penetration rates, revenue and EBITDA growth metrics are stronger than
Charter's capital structure and financial strategy remains consistent and
centers on simplifying its debt structure, extending its maturity profile while
reducing leverage to its target range of 4x to 4.5x. Pro forma leverage remains
outside the company's target at 5.1x for the LTM period ended Sept. 30, 2012.
Fitch had expected Charter's credit profile would improve modestly during 2013,
however the incremental debt associated with the acquisition will slow the pace
of improvement. 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, 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.
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 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 $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, $267
million and $418 million during 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 $1.5 billion of bank debt is scheduled to mature.
--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
--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+'.