Fitch Rates CCO Holdings' Senior Unsecured Notes Issuance 'BB-'; Outlook
CHICAGO -- December 12, 2012
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
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
--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.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
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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