Feb 28 - Fitch Ratings has assigned a 'BB-' rating to CCO Holdings, LLC's
(CCOH) $1 billion issuance of senior unsecured notes consisting of a tranche due
2021 and a tranche due 2023. Proceeds from the offering are expected to be used
for general corporate purposes including repayment of existing bank debt
outstanding at Charter Communications Operating, LLC (CCO). CCOH and CCO are
indirect wholly owned subsidiaries of Charter Communications, Inc.
(Charter). As of Dec. 31, 2012, Charter had approximately $12.9 billion of debt
(principal value) outstanding including $3.3 billion of senior secured debt.
KEY RATING DRIVERS:
-- Issuance is in line with Charter's strategy to simplify its debt structure
and extend its maturity profile while reducing leverage to its target range of
4x to 4.5x.
-- The issuance will not result in any material improvement of the company's
credit profile but reduces refinancing risk related to 2016 scheduled
--Acquisition of Bresnan Broadband Holdings, LLC (Bresnan) is neutral to
--Bresnan acquisition fits strategically and will not generate meaningful cost
synergies or present integration risks.
--Expected improvement in Charter's credit profile likely to be delayed by
Fitch's ratings incorporate Charter's pending acquisition of Bresnan for $1.625
billion in cash. Fitch anticipates the debt-funded acquisition will modestly
increase Charter's leverage; however, leverage will remain within Fitch's
expectations for the rating. Charter's leverage will increase to approximately
5.1x on a pro forma basis as of the latest 12 months (LTM) ending Dec. 31, 2012
after giving consideration for the incremental debt associated with the proposed
transaction and Bresnan's EBITDA generation.
Charter's capital structure and financial strategy remains consistent and
centers on simplifying its debt structure, and extending its maturity profile
while reducing leverage to its target range of 4x to 4.5x. Pro forma leverage
remains outside the company's target at 5.1x for the LTM period ended Dec. 31,
2012. The incremental debt associated with the acquisition will slow the pace of
expected improvement of Charter's credit profile during 2013. Fitch now
anticipates Charter's leverage will remain close to 5x at the end of 2013 before
declining somewhat to 4.6x by the end of 2014.
Bresnan operates cable systems in Montana, Wyoming, Colorado and Utah passing
approximately 666,000 homes. The acquisition is in line with Charter's strategy
to provide service in largely secondary and rural markets. However, Bresnan's
cable service area does not complement Charter's existing service footprint so
the acquisition will not generate any meaningful operational synergies (outside
of programming cost savings) or create integration risks. From Fitch's
perspective Bresnan has a relatively strong operating profile. Bresnan's service
penetration rates, revenue and EBITDA growth metrics are stronger than
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, and set the foundation for sustainable growth while creating more
efficient operating profile. However, Fitch expects the strategy will hinder
free cash flow (FCF) generation and strain EBITDA margins during 2013, limiting
overall financial flexibility and slowing the company's progress toward
achieving its leverage target. During the short term, Fitch believes that
customer connections, revenue, and expense metrics will be negatively affected.
Charter generated approximately $131 million of FCF during the year ended 2012,
down markedly from the $426 million of FCF produced during the year ended 2011.
Charter's more viable capital structure has positioned the company to generate
positive FCF. However, Fitch expects FCF generation during 2013 will suffer from
the effects of lower operating margin and higher capital intensity. Capital
expenditures during 2012 increased 33% relative to 2011 to approximately $1.8
billion, representing 23% of revenues. Fitch believes capital intensity will
remain elevated during 2013 and 2014. Fitch anticipates Charter will generate
between $250 million and $300 million of FCF during 2013 and produce between
$450 million to $500 million during 2014 when stronger margins return.
Rating concerns center on Charter's elevated financial leverage (relative to
other large cable MSOs), and 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 cash on hand, borrowing capacity from CCO's $1.15 billion revolver
(approximately $960 million was available as of Dec. 31, 2012) and expected FCF
generation. Charter's revolver commitment expires on April 11, 2017.
Charter has successfully extended its maturity profile with only 5.9% of
outstanding debt as of Dec. 31, 2012 is scheduled to mature before 2016,
including $260 million and $411 million during 2013 and 2014, respectively. The
current issuance reduces the refinancing risk related to 2016 scheduled
maturities. Pro forma for the current issuance, 2016 scheduled maturity is
reduced to approximately $591 million from $1.6 billion as of Dec. 31, 2012.
--Positive rating actions possible if leverage declines below 4.5x;
--Company demonstrates progress in closing gaps relative to industry peers on
service penetration rates and strategic bandwidth initiatives;
--Operating profile strengthens as company captures sustainable revenue and cash
flow growth envisioned when implementing the current operating strategy.
--Negative rating actions would likely coincide with leveraging transaction that
increases leverage beyond 5.5x in the absence of a credible deleveraging plan;
--Adoption of a more aggressive financial strategy;
--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.
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.8, 2012);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities
Within a Corporate Group Structure)' (Aug. 8, 2012);
--'Rating Telecom Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research
Rating Telecom Companies
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology