Aug 8 - Fitch Ratings has assigned a 'BB-' rating to CCO Holdings, LLC's
(CCOH) proposed $1 billion issuance of senior unsecured notes due 2022. Proceeds
from the offering are expected to be used for general corporate purposes
including funding the anticipated redemption of CCH II, LLC's 13.5% senior notes
due 2016 on or before Nov. 30, 2012 ($1.146 billion principal outstanding as of
June 30, 2012). CCOH, CCH II and Charter Communications Operating, LLC (CCO) are
indirect wholly owned subsidiaries of Charter Communications, Inc.
(Charter). As of June 30, 2012, Charter had approximately $12.8 billion of debt
(principal value) outstanding including $4.3 billion of senior secured debt.
The issuance is in line with Charter's strategy to simplify its debt structure
and extend its maturity profile, however, the credit profile has not
substantially changed. 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 is reducing its
overall reliance on secured debt.
Charter's liquidity position is adequate given the current rating and is
primarily supported by the borrowing capacity from CCO's $1.1 billion revolver
(availability of approximately $756 as of June 30, 2012) and expected free cash
flow (FCF) generation. Commitments under the revolver will expire during April
2017. Charter has a very manageable near term maturity schedule seeing that
approximately 94% of the outstanding principal balance outstanding as of June
30, 2012 is scheduled to mature after year end 2015. Near term scheduled
maturities consist of approximately $15 million of debt scheduled to mature
during 2012 followed by $268 million in 2013 and $418 million in 2014.
Fitch's ratings incorporate Charter's more viable capital structure, increased
financial flexibility and stable liquidity profile. Additionally, the ratings
are supported by Charter's size and scale as the fourth largest cable multiple
system operator (MSO) in the United States. Fitch believes that Charter's
capital structure along with a relatively stable operating profile positions the
company to generate sustainable amounts of FCF (defined as cash flow from
operations less capital expenditures and dividends). Charter generated
approximately $426 million of FCF during 2011, which followed approximately $702
million of FCF during 2010. However, elevated levels of capital expenditures and
higher interest costs will pressure FCF generation during 2012. FCF during the
first half of 2012 amounted to approximately $128 million reflecting a decline
of nearly 44% versus last year. Capital expenditures during the first six months
of 2012 increased nearly 19% to approximately $808 million. Fitch anticipates
Charter will generate FCF ranging between $250 million and $400 million during
Ratings concerns center on Charter's elevated financial leverage (relative to
other large cable MSOs), a comparatively weaker subscriber clustering profile
and service penetration rates that lag behind industry leaders. 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.
Importantly, Charter continues to deploy DOCSIS 3.0 and switched digital video
throughout its cable plant, which positions the company to efficiently manage
its cable plant bandwidth innovate its service offerings.
While acknowledging the increased level of investment in its business, Fitch
believes that Charter's financial strategy will begin to shift from its balance
sheet to enhancing shareholder returns during 2012 given that the company is
approaching its leverage target of between 4 times (x) and 4.5x. Debt
outstanding as of June 30, 2012 totaled approximately $12.8 billion (principal
value), of which 37% was senior secured. Leverage for the latest 12 months (LTM)
period ending June 30, 2012 was year ended 2011 was 4.8x largely unchanged
compared with leverage as of year-end 2011. Fitch believes that Charters credit
profile will improve modestly during the ratings horizon with leverage declining
to 4.6x by the end of 2012 and approach 4.2x by the end of 2014.
The Stable Outlook reflects Fitch's belief that the company will continue to
extend its maturity schedule and Fitch's expectation that Charter's operating
profile will not materially decline during the near term in the face of
competition and poor housing and employment conditions.
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.
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.
Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Global Telecoms Companies' (Sept. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Global Telecoms Companies - Sector Credit Factors