From the Wires
Fitch Rates CCO Holdings' Senior Unsecured Notes Issuance 'BB-'; Outlook Stable
By: Business Wire
Dec. 12, 2012 12:15 PM
Fitch Ratings has assigned a 'BB-' rating to CCO Holdings, LLC's (CCOH) proposed $750 million issuance of senior unsecured notes 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 Sept. 30, 2012, Charter had approximately $13.7 billion of debt (principal value) outstanding including $4 billion of senior secured debt.
The 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. However, the issuance will not result in any material improvement of the company's credit profile. Charter's debt structure continues to evolve into a more traditional hold-co/op-co structure, with senior unsecured debt issued by CCOH and senior secured debt issued by CCO. Charter has eliminated the second lien tier of the company's debt structure during 2012 and has redeemed the high-yield debt issued by CCH II.
Leverage remains outside the company's target at 5.1x for the LTM period ended Sept. 30, 2012 and 4.9x pro forma for the $678 million redemption of CCH II's 13.5% senior notes due 2016. Fitch anticipates Charter's leverage will decline to 4.75x by the end of 2013 and 4.25x by year-end 2014.
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, including $6 million, $260 million and $411 million during the remainder of 2012, 2013 and 2014 respectively. The current issuance is expected to address Charter's 2016 maturity tower. Fitch anticipates that Charter's 2016 scheduled maturities will be reduced to approximately $1.6 billion from $2.3 billion as of Sept. 30, 2012 when adjusted for today's issuance.
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 ($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. The amount 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.
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 a 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 believes customer connections, revenue and expense metrics will be negatively impacted in the short term. In addition, 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.
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 and $300 million of free cash flow during 2013 and produce over $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.
What Could Trigger a Positive Rating Action
--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.
What Could Trigger a Negative Rating Action
--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.
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:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating Telecom Companies
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