Jan 23 - Fitch Ratings affirms the 'BB-' Issuer Default Rating (IDR)
assigned to DISH Network Corporation (DISH) and its wholly owned
subsidiary DISH DBS Corporation (DDBS). Fitch has also affirmed the 'BB-' rating
assigned to the senior unsecured notes issued by DDBS. The Rating Outlook for
all of DISH's ratings remains Negative. DISH had approximately $10.4 billion of
debt outstanding as of Sept. 30, 2012.
Key Rating Drivers
The key rating factors reflected by the ratings include:
--Weakening credit protection metrics;
--Lack of visibility and elevated event risks related to DISH's wireless
--Strong liquidity and free cash flow generation;
--Inconsistent operating results.
DISH's credit profile has weakened considerably during the course of 2012 due to
inconsistent operating performance and elevating debt levels, which together
with the uncertainty related to the company's yet articulated wireless strategy,
limits the company's financial flexibility at the current ratings level. On a
pro forma basis, total debt outstanding as of Sept. 30, 2012 increased nearly
59% relative to year-end 2011 levels to approximately $11.9 billion. DISH's
leverage increased to 3.8x on a pro forma basis as of Sept. 30, 2012 calculated
on a last 12 month (LTM) basis. The cash proceeds from the company's incremental
debt issuances have largely remained on its balance sheet purportedly to support
DISH's wireless strategy.
The Negative Outlook encompasses the lack of visibility as well as the potential
capital and execution risks associated with DISH's wireless strategy. The
economic viability of the strategy is questionable given the presence of strong
entrenched market participants particularly if DISH's wireless offering fails to
provide any meaningful service differentiation from established competitive
offerings. Fitch acknowledges that a wireless network can potentially provide
DISH with further strategic flexibility and enable the company to diversify its
business and capture incremental revenue and cash flow growth.
Event risks are elevated as the company contemplates additional acquisitions of
spectrum or assets to support the wireless strategy. To that end, the evolution
of DISH's wireless strategy took a step forward as evidenced by the company's
proposal to enter into a multi-faceted, complicated series of agreements with
Clearwire Corporation. Fitch Ratings believes the proposed transaction is a
positive development for DISH, but could also pressure its current ratings.
If the bid for Clearwire is successful, DISH would secure a potential partner to
build and deploy a wireless network. DISH had previously signaled its preference
to participate in a network infrastructure sharing arrangement to enter into the
wireless market as opposed to deploying a greenfield wireless network. However,
recent consolidation, investments and spectrum acquisitions within the wireless
sector has reduced the number of potential entities DISH can partner with to
deploy its wireless network creating an urgency to establish a partnership with
Clearwire. In accordance with the terms of DISH's proposal, DISH would acquire,
among other things, approximately 24% of Clearwire's wireless spectrum for $2.2
billion and a minimum of 25% of Clearwire's outstanding common stock.
DISH secured FCC approval to use 40 MHz of S-band wireless spectrum (now
designated as the AWS - 4 band). The FCC order includes power limitations on a
portion of DISH's uplink spectrum and requires DISH to tolerate potential
interference from adjacent wireless spectrum. The order requires DISH to provide
reliable signal coverage and terrestrial service to 40% of its total AWS - 4
population within four years. The final build-out milestone requires signal
coverage and service to 70% of population in each of its license areas within
seven years. If DISH fails to meet the interim build-out requirement, the final
build-out requirement will be accelerated from seven years to six years.
Furthermore, if the final build-out requirement is not satisfied, DISH's license
for each economic area not in compliance with the final build-out requirement
will terminate automatically.
The company's liquidity position is strong and supported by cash and marketable
securities on hand and expected free cash flow generation. Cash marketable
security balances, pro forma for the $1.5 billion senior note issuance during
December 2012, increase to approximately $7.9 billion. Fitch notes that the
company used approximately $700 million in cash to settle litigation and $450
million to fund a $1 per share special dividend. The company also benefits from
a favorable maturity schedule, as the next scheduled maturity is in 2013
totaling $500 million followed by $1 billion during 2014. Fitch notes, however,
that the company does not maintain a revolver, which increases DISH's reliance
on capital market access to refinance current maturities, elevating the
refinancing risk within the company's credit profile. The risk is offset by the
company's consistent access to capital markets and strong execution.
DISH generated nearly $857 million of free cash flow (defined as cash flow from
operations less capital expenditures and dividends) during the LTM ended Sept.
30, 2012. Fitch expects capital intensity will be relatively consistent over the
near term and that capital expenditures will continue to focus on subscriber
retention and capitalized subscriber premises equipment. Absent further
investment in a wireless network or other strategic initiative, Fitch
anticipates that DISH will continue generating nearly $1 billion of annual free
cash flow during the current ratings horizon while incorporating higher levels
of cash taxes.
Fitch believes the company's overall credit profile has limited capacity to
accommodate DISH's inconsistent operating performance. While subscriber metrics
remain weak, they have stabilized somewhat when compared to 2011 results.
However, DISH struggles to increase service ARPUs as the company elected not to
take a price increase during 2012. This decision combined with higher
programming and subscriber acquisition costs has had a dramatic effect on the
company's operating margins and EBITDA generation. These factors contributed to
an 18.7% year-over-year decline in DISH's third-quarter EBITDA. EBITDA margin
during the current period fell 400 basis points compared to the third quarter of
last year, to 19.9%.
Additional rating concerns center on DISH's ability to adapt to the evolving
competitive landscape, DISH's lack of revenue diversity and narrow product
offering relative to its cable MSO and telephone company video competition, and
an operating profile and competitive position that continue to lag behind its
peer group. DISH's current operating profile is focused on its maturing video
service offering and lacks growth opportunities relative to its competition.
Revision of the Outlook to Stable at the current rating level can occur as the
company demonstrates that it can execute its wireless strategy in a
credit-neutral manner. In addition operating metrics, in particular subscriber
additions, ARPU growth and EBITDA margins will need to begin to trend positive.
Fitch believes negative rating action will likely coincide with the company's
decision to execute a wireless strategy, or other discretionary management
decisions that weaken its ability to generate free cash flow, erode operating
margins, and increase leverage higher than 5x without a clear strategy to
de-lever the company's balance sheet.
Fitch has affirmed the following ratings with a Negative Rating Outlook:
DISH Network Corporation
--IDR at 'BB-'.
DISH DBS Corporation
--IDR at 'BB-';
--Senior unsecured notes at 'BB-'.