Fitch Affirms Charter Communication's IDR at 'BB-'; Outlook Stable
CHICAGO -- December 06, 2012
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.
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.
Fitch anticipates that capital spending will range between 20% to 22% of
revenues during the ratings horizon. A significant portion of the company's
capital expenditures will be success- based in support of the company's
all-digital initiative. The company's capital intensity is expected to be
among the highest within the larger cable multiple system operators.
Increased operating and selling expenses supporting the company's transition
to its new selling and operating strategies will lead to EBITDA margin
erosion. Charter's EBITDA margin was 36.1% during the last 12 month period
ending Sept. 30, 2012. Fitch expects margins to decline by up to 100 basis
points during 2013 before rebounding somewhat during 2014. The stronger
margins along with moderating capital intensity are expected to spur free cash
flow growth and strengthen the company's credit profile.
Charter's capital structure and financial strategy remain relatively
consistent and centers on simplifying its debt structure, extending its
maturity profile while reducing leverage to its target range of 4x to 4.5x.
The company'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
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
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
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 $8 million, $267 million and $418 million during the remainder of
2012, 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 $2.3
billion of bank debt is scheduled to mature.
What Could Trigger a Positive Rating Action
--Positive rating actions would be contemplated as leverage declines below
--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
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.
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+'.
Fitch has withdrawn the following ratings:
CCH II, LLC
--IDR at 'BB-';
--Senior unsecured debt at 'B+'.
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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