BRIEF-Pacific updates on status of its restructuring transaction
* Pacific provides an update on status of its restructuring transaction
Nov 26 - Fitch Ratings has assigned a 'BBB+' rating to Cox Communications, Inc.'s (CCI) proposed issuance of 10- and 30-year senior unsecured notes. Fitch currently has a 'BBB+' Issuer Default Rating (IDR) on CCI, as well as for its parent Cox Enterprises Inc. (CEI). The Rating Outlook for both is Stable. A full list of ratings can be found at the end of this release. The proceeds of the issuance will be used to fund a $500 million dividend to CEI, as well as to redeem a portion of the $1.25 billion 5.45% unsecured notes maturing in December 2014.The notes will be issued under CCI's existing indenture (dated June 27, 1995) and will be pari passu with all existing CCI debt. Similar to existing notes, the new bonds will not have any financial covenants and no change of control repurchase requirements. Secured debt will be limited to 15% of total debt. The partial redemption of the 2014 notes will reduce the company's near-term maturity schedule. CCI also has a $600 million maturity due in June 2013, which the company will have the ability to repay with cash on hand and revolver borrowings. The $500 million dividend to CEI comes on the heels of a $900 million dividend CCI paid to CEI in August 2012. CEI used $450 million of this to reduce debt and made a $450 million dividend to its shareholders (primarily the Cox family). Fitch believes the August shareholder dividend paid by CEI was driven by uncertainties around future tax policy, and believes that future dividends will revert back to historical levels (less than $100 million). The increase in debt from the announced $500 million dividend to CEI is more than offset by CCI's repayment of a $900 million maturity in October 2012, principally with cash on hand. As a result, CCI's pro forma leverage likely declined very slightly from the 2.3x reported at Sept. 30, 2012. Fitch upgraded CCI and CEI one notch to 'BBB+' in July 2012, based on the improvement in credit protection metrics as a result of active debt reduction and EBITDA growth, as well as the company's decision to exit the wireless business. The ratings incorporate the expectation that CEI will maintain its 2.5x maximum leverage threshold (based on its reported leverage). Fitch believes that acquisitions will remain a part of the company's growth strategy as it seeks to grow and diversify its businesses. The ratings also incorporate expectations that any transactions that result in leverage above this metric will be followed by a period of focused deleveraging to return to below 2.5x. CEI reported leverage of 2.2x at Sept 30, 2012. Fitch's ratings reflect the size and strong competitive position of CCI, the company's largest business segment and the third-largest cable multiple system operator (MSO) in the U.S. CCI's operating profile derives its strength from its formidable subscriber clustering profile in the company's nine primary markets located in 18 states, and growing revenue diversity as the result of the ongoing success of its commercial business. In Fitch's opinion CEI's cable business, and the cable industry overall, has proven to be resilient to persistent competitive pressures and weak housing formation and employment markets. Fitch links the IDRs of CCI and CEI in accordance with its criteria. While no cross defaults or cross guarantees exist between the entities, Fitch believes that CCI's probability of default would be understated (rated higher) if it did not consider CEI's businesses and weaker credit profile. At the same time, Fitch believes it would overstate CEI's probability of default if the rating only incorporated the CEI businesses on a standalone basis and did not consider potential upstream cash flows CEI could access in distress. The ratings recognize the company's solid financial flexibility, as well as the sound operating profile and competitive position of the cable business. The ratings are also supported by the company's demonstrated conservative financial policies and commitment to investment grade ratings. Fitch expects that CCI will generate the majority of CEI's consolidated revenues and cash flow but notes that each of CEI'a segments is positioned to generate positive free cash flow over Fitch's ratings horizon. Within the cable business, ratings concerns are centered on the company's ability to adapt to changing competitive dynamics and maintain its relative market position given the challenging competitive environment. The competitive pressure associated with the service overlap among the different telecommunications service providers, while intense, is not expected to materially change during the ratings horizon. In addition, lackluster housing formation conditions and a weak employment environment will likely hinder the company's ability to grow its subscriber base given the maturity of CCI's services. The slower subscriber growth metrics together with ongoing programming cost inflation may limit the company's ability to expand operating margins. CCI's liquidity position at Sept. 30 was solid, with $944 million of cash on hand (much of which likely went to the Oct. 1 bond payment) and $2 billion available under the $2 billion revolver maturing July 2016. Either CEI or CCI may borrow up to $2 billion, provided that the aggregate amount outstanding under the facility cannot exceed $2 billion. CEI and CCI are each severally, but not jointly, liable for their respective borrowing. Liquidity is further boosted by CCI's stable and recurring free cash flow, which totaled 1.3 billion before dividends to CEI during the last 12-month period ended Sept. 30, 2012 ($24 million cash burn when including dividends paid in December 2011 and August 2012). Subject to certain conditions CEI has the ability to access the cash flows from CCI. CEI's credit agreement does not limit dividends from CCI as long as leverage (calculated in accordance with covenants) is below 5.0x. In addition to the previously discussed 2012 dividends, CCI paid dividends to the parent of $450 million in 2011, and $500 million in 2010 and 2009, which CEI used to repay debt. WHAT COULD TRIGGER A RATING ACTION Positive: Fitch does not anticipate further ratings upside. An upgrade would only come with a commitment to, and a credible rationale for, a substantially tighter leverage target, which is not expected. Negative: Such rating actions would occur in tandem with a change in the company's capital structure policy or an event such as a debt-financed dividend or leveraging acquisition that would drive leverage towards 3.0x (as calculated by CEI) for a sustained period of time, with no credible plan to delever back to 2.5x over a 12-24-month timeframe. Fitch rates CCI and CEI as follows: Cox Enterprises, Inc. --IDR at 'BBB+'; --Senior unsecured debt at 'BBB+'. --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Cox Communications, Inc. --IDR at 'BBB+'; --Senior unsecured debt at 'BBB+'. --Short-term IDR at 'F2'; --Commercial paper at 'F2'.
* Pacific provides an update on status of its restructuring transaction
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