Nov 21 - Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR)
assigned to DIRECTV Holdings LLC (DTVH). Fitch has also affirmed specific issue
ratings assigned to DTVH as outlined at the end of this press release. DTVH is a
wholly owned indirect subsidiary of DIRECTV. As of Sept. 30, 2012 DTVH had
approximately $17.2 billion of debt outstanding.
DIRECTV's financial strategy remains consistent and is focused on returning
capital to its shareholders in the form of share repurchases and maintaining a
2.5x long-term leverage target. Consolidated credit protection metrics are
aligned with Fitch's expectations and the current rating category. In line with
the company's financial strategy, total debt outstanding as of Sept. 30, 2012
increased 27.5% relative to year end 2011 to approximately $17.2 billion.
Consolidated leverage increased to 2.29x as of the LTM period ended September
30, 2012 when compared to 1.90x as of year-end 2011 and 1.93x as of the LTM
period ended Sept. 30, 2011.
Proceeds from incremental debt issuance have been used to fund share repurchases
at DIRECTV. Through the first nine months of 2012 DIRECTV has repurchased 82
million of its shares for $3.9 billion. As of Sept. 30, 2012 approximately $3.0
billion of capacity remains on the current share repurchase authorization.
Overall the ratings for DTVH reflect the size, scale and strong competitive
position of DTVH's operations as the second largest multi-channel video
programming distributor (MVPD) in the United States with nearly 20 million video
subscribers as of Sept. 30, 2012, and the growth prospects of DIRECTV's Latin
American (DTVLA) business segment. Additionally the ratings incorporate Fitch's
expectation for continued generation of free cash flow (before dividends to
DIRECTV) and the company's high level of financial flexibility within the
existing ratings category. These considerations, along with the DIRECTV's 2.5x
long-term leverage target, the DIRECTV guaranty and an operating strategy
primarily focused on targeting high-value subscribers and controlling subscriber
churn, strongly position the company's credit profile within the current rating.
Fitch believes there is adequate flexibility within the current ratings to
accommodate ongoing risks to its business including weak macro-economic trends,
increasing programming costs, technology evolution and unrelenting competitive
pressures. Notwithstanding its video centric service offering, DTVH has a
strong competitive position. However, video services within the United States
are a mature product with, in Fitch's opinion, limited revenue and subscriber
DIRECTV's operating strategy within its US business segment shifted from
subscriber growth to balancing subscriber volume growth with profitability. Core
to the operating strategy is a more discipline approach to new subscriber
acquisition recognizing slower subscriber growth on the horizon and a more
rational and sustainable pricing and promotion structure.
Ratings concerns center on DTVH's ability to adapt to the evolving competitive
landscape and weak economic and housing formation conditions. Ratings also
factor the company's lack of revenue diversity and narrow product offering
relative to its cable MSO and telephone company competition. In Fitch's view
DTVH's ability to innovate its video service to, among other things, establish a
path to become more IP-video enabled is critical for the company to control
subscriber churn and subscriber retention spending, grow video ARPU and expand
operating margins. The ratings also incorporate Fitch's belief that DTVH's
satellite infrastructure can put the company at a competitive disadvantage
relative to its competition's respective technology and network positions as
video content is increasingly consumed over alternate platforms and devices.
DTVH bondholders benefit (through DIRECTV's guaranty of DTVH indebtedness) from
DTVLA's size and strong competitive position as one of Latin America's largest
multi-channel video service providers. DTVLA represents DIRECTV's fastest
growing operating segment which generated approximately $5.9 billion of revenue
and $1.8 billion of EBITDA during the LTM period ended Sept. 30, 2012. Strong
subscriber growth within the segment has limited segment FCF generation (defined
as cash flow from operations less capital expenditures and dividends), which
amounted to approximately $44 million during the LTM period ended Sept 30, 2012
representing less than 2% of consolidated FCF. The market dynamics in Latin
America, in particular a lower pay TV service penetration rate (relative to the
United States) and a growing middle class position DTVLA to generate meaningful
EBITDA and free cash flow growth over the ratings horizon. DTVLA operates a
direct broadcast satellite business throughout Latin America and the Caribbean
under the DIRECTV and SKY brands.
Based on Fitch's expectation for continued FCF, Fitch believes DIRECTV's overall
financial flexibility and liquidity position is strong. Fitch acknowledges that
DIRECTV's share repurchase authorization represents a significant use of cash,
however Fitch believes that the company has the flexibility to reduce the level
of share repurchases should the operating environment materially change in order
to maximize flexibility. The company generated nearly $2.5 billion of FCF
during the LTM period ended Sept. 30, 2012. Fitch anticipates modest free cash
flow growth driven by mid-single digit revenue growth along with stable EBITDA
margins and consistent capital spending in the range of $2.5 billion annually.
In addition to free cash flow generation the company's liquidity position is
supported by the collective available borrowing capacity under its $2.5 billion
revolver (Consisting of a $1.0 billion revolving credit facility maturing Feb.
2016 and a $1.5 billion revolver maturing Sept. 2017. As of Sept. 30, 2012 all
of which was available) and $2.4 billion of cash as of Sept. 30, 2012. The
company's favorable maturity schedule also adds to its overall financial
flexibility. As of September 30, 2012, DTVH's next scheduled maturity is not
until 2014 when $1.0 billion of senior unsecured notes will mature.
DIRECTV's down-stream guaranty of DTVH's senior unsecured notes has a neutral
effect on DTVH's credit profile, in Fitch's opinion. DTVH bondholders will
benefit from the cash flows generated from DIRECTV's businesses owned outside of
DTVH, including DIRECTV Latin America Holdings, Inc. and DIRECTV Sports
Networks, LLC. However, Fitch expects DIRECTV to leverage the same cash flows to
2.5x consolidated EBITDA muting the incremental benefit of DIRECTV's guaranty.
Fitch believes that DTVH will continue to be the primary issuer of unsecured
debt. Future note issuances are expected to be guaranteed by DIRECTV and treated
on a pari passu basis with DTVH's existing unsecured notes. DIRECTV is not
restricted from issuing debt from either DIRECTV or DTVLA. Debt issued at either
entity will diminish DIRECTV's guaranty and be treated as an event risk by
Additionally DIRECTV is not restricted from selling all or substantially all of
its assets or merging or consolidating with other entities in contrast to other
guarantors of DTVH's senior notes. The sale of assets, in particular DIRECTV's
ownership stake in DTVLA, would weaken DIRECTV's guaranty and likely lead to
negative rating actions.
What Could Trigger a Positive Rating Action:
-- Assumption of a more conservative financial strategy, in the absence of any
material erosion of the operating profile of DIRECTV's U.S. business segment,
that would reduce leverage to 2.0x on sustainable basis.
--The growing importance of the DIRECTV's Latin American segment, in terms of
revenue, EBITDA and FCF generation will lead to positive rating actions holding
the operating profile of the company's US business constant.
What Could Trigger a Negative Rating Action:
--A change in the existing guaranty structure or a sale of DIRECTV's ownership
stake in DTVLA.
--Adoption of a weaker leverage target or an event such as a debt-financed
dividend or leveraging transaction that increases leverage higher than 3.5x in
the absence of a creditable de-leveraging plan.
Fitch has affirmed the following ratings with a Stable Outlook:
DIRECTV Holdings LLC
--IDR at 'BBB-';
--Senior Unsecured Debt at 'BBB-';
Fitch has assigned the following ratings with a Stable Outlook
--Senior Unsecured Credit Facility maturing Feb. 2016 at 'BBB-'
--Senior Unsecured Credit Facility maturing Sept. 2017 at 'BBB-'