Dec 20 - Fitch Ratings has assigned a 'BB-' rating to DISH DBS Corporation's
(DDBS) $1.5 billion offering of senior secured notes due 2023. DDBS is a wholly
owned subsidiary of DISH Network Corporation (DISH, Fitch Issuer Default Rating
of 'BB-'). Proceeds from the offering are expected to be used for general
corporate purposes including spectrum-related transactions which will support
the company's unspecified wireless strategy. DISH had approximately $10.4
billion of debt outstanding as of Sept. 30, 2012. The Rating Outlook is
DISH's credit profile has weakened considerably during the course of 2012 due to
inconsistent operating performance and elevating debt levels. DISH's leverage
was 3.3x on a last 12 month (LTM) basis as of Sept. 30, 2012, which is over a
full turn higher than year-end 2011 measures. Pro forma for the issuance,
DISH's leverage increased to 3.8x as of Sept. 30, 2012, which limits the
company's financial flexibility at the current ratings.
The company's liquidity position is strong and supported by cash and marketable
securities on hand and expected, albeit pressured, free cash flow generation.
Cash marketable security balances, pro forma for the issuance, increase to
approximately $7.9 billion. Fitch expects near term-uses of cash will include
$700 million legal settlement and a $1 per share special dividend expected to
total $450 million. 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's wireless strategy took a step forward as the company 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 Negative Outlook encompasses the lack of visibility as well as the potential
capital and execution risks associated with DISH's wireless strategy. While DISH
has yet to fully articulate its wireless strategy, the company has committed
over $3.5 billion of capital to acquire wireless spectrum. Event risks are
elevated as the company contemplates additional acquisitions of spectrum or
assets to support the wireless strategy. Fitch believes the company will strike
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
have reduced the number of potential entities DISH can partner with to deploy
its wireless network.
Fitch believes the company's overall credit profile has limited capacity to
accommodate DISH's inconsistent operating performance. DISH lost approximately
19,000 subscribers during the third quarter of 2012 and has gained approximately
97,000 subscribers during the LTM ended Sept. 30, 2012. DISH is in the process
of re-positioning its brand away from a value proposition to a more technology
and product focus. The challenge is to re-energize subscriber growth without
sacrificing subscriber economics (arguably already weak) or credit quality. Key
to a successful transition will be the company's ability to reduce churn while
introducing new products and services valued by subscribers that are not easily
replicated by the competition.
DISH continues to struggle 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 cash flow generation. Lower pre-SAC cash flow combined with a 14.7%
increase in subscriber acquisition costs led 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%, which
unfavorably compares to DIRECTV's reported EBITDA margin of 23%.
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 relatively stable levels of free
cash flow during the current ratings horizon while incorporating higher levels
of cash taxes.
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
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 4x without a clear strategy to
de-lever the company's balance sheet.