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
--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+'.