Feb 11 - Fitch Ratings has affirmed the ‘BB-’ Issuer Default Rating (IDR) assigned to CCO Holdings, LLC (CCOH) and Charter Communications Operating, LLC (CCO). Each of CCOH and CCO are indirect wholly owned subsidiaries of Charter Communications, Inc. (Charter). Fitch has also affirmed the specific issue ratings assigned to Charter’s various subsidiaries as outlined below. The Rating Outlook for all of Charter’s ratings is Stable. Approximately $13.7 billion of debt (principal value) outstanding as of Sept. 30, 2012 is affected by Fitch’s action.
--Acquisition of Bresnan Broadband Holdings, LLC (Bresnan) neutral to Charter’s ratings;
--Bresnan acquisition fits strategically and will not generate meaningful cost synergies or present integration risks;
--Expected improvement in Charter’s credit profile likely delayed by Bresnan acquisition.
The affirmation of Charter’s ratings follows the company’s announcement that it intends to purchase Bresnan Broadband Holdings, LLC 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) period ending Sept. 30, 2012 after giving consideration for the incremental debt associated with the proposed transaction and Bresnan’s EBITDA generation.
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 Charter‘s.
Charter’s capital structure and financial strategy remains consistent and centers on simplifying its debt structure, 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 Sept. 30, 2012. Fitch had expected Charter’s credit profile would improve modestly during 2013, however the incremental debt associated with the acquisition will slow the pace of improvement. 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.
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, set the foundation for sustainable growth while creating more efficient operating profile. However, Fitch expects the strategy will hinder free cash flow generation and strain EBITDA margins during 2013 limiting overall financial flexibility and slowing the company’s progress to achieving its leverage target. During the short term, Fitch believes that customer connections, revenue and expense metrics will be negatively impacted.
Charter’s more viable capital structure has positioned the company to generate positive free cash flow. However Fitch expects free cash flow generation during 2012 and 2013 will suffer from the effects of lower operating margin and higher capital intensity. Charter generated approximately $193 million of free cash flow during the LTM period ended Sept. 30, 2012 down markedly from the $426 million of free cash flow produced during the year-ended 2011. Fitch anticipates Charter will generate between $250 million and $300 million of free cash flow 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), 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 $868 million of cash on hand as of Sept. 30, 2012 (Fitch notes that $768 million of cash was used to fund the partial redemption of CCH II senior notes in October 2012), borrowing capacity from CCO’s $1.15 billion revolver (all of which was available as of Sept. 30, 2012) and expected free cash flow generation. Fitch notes that amounts available for borrowing under CCO’s revolver was approximately $715 million after giving effect for the redemption of the remaining $468 million of CCH II’s senior notes in November 2012.
Charter has successfully extended its maturity profile as only 5.8% of outstanding debt as of Sept. 30, 2012 is scheduled to mature before 2016, $267 million and $418 million during 2013 and 2014 respectively. Fitch anticipates that a large portion of near term maturities will retired with current cash and future free cash flow generation. Refinancing risk elevates during 2016 when approximately $1.5 billion of bank debt is scheduled to mature.
--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.
--Operating profile strengthens as the company captures sustainable revenue and cash flow growth envisioned when implementing the current operating strategy.
--Fitch believes negative rating actions would likely coincide with a leveraging transaction that increases leverage beyond 5.5x in the absence of a credible deleveraging plan;
--Adoption of a more aggressive financial strategy;
--A 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.
Fitch has affirmed the following ratings with a Stable Outlook:
CCO Holdings, LLC
--IDR at ‘BB-';
--Senior secured term loan at ‘BB+';
--Senior unsecured debt at ‘BB-'.
Charter Communications Operating, LLC
--IDR at ‘BB-';
--Senior secured credit facility at ‘BB+'.