Fitch Affirms DISH's IDR at 'BB-'; Outlook Remains Negative
CHICAGO -- January 23, 2013
Fitch Ratings affirms the 'BB-' Issuer Default Rating (IDR) assigned to DISH
Network Corporation (DISH) and its wholly owned subsidiary DISH DBS
Corporation (DDBS). Fitch has also affirmed the 'BB-' rating assigned to the
senior unsecured notes issued by DDBS. The Rating Outlook for all of DISH's
ratings remains Negative. DISH had approximately $10.4 billion of debt
outstanding as of Sept. 30, 2012.
Key Rating Drivers
The key rating factors reflected by the ratings include:
--Weakening credit protection metrics;
--Lack of visibility and elevated event risks related to DISH's wireless
--Strong liquidity and free cash flow generation;
--Inconsistent operating results.
DISH's credit profile has weakened considerably during the course of 2012 due
to inconsistent operating performance and elevating debt levels, which
together with the uncertainty related to the company's yet articulated
wireless strategy, limits the company's financial flexibility at the current
ratings level. On a pro forma basis, total debt outstanding as of Sept. 30,
2012 increased nearly 59% relative to year-end 2011 levels to approximately
$11.9 billion. DISH's leverage increased to 3.8x on a pro forma basis as of
Sept. 30, 2012 calculated on a last 12 month (LTM) basis. The cash proceeds
from the company's incremental debt issuances have largely remained on its
balance sheet purportedly to support DISH's wireless strategy.
The Negative Outlook encompasses the lack of visibility as well as the
potential capital and execution risks associated with DISH's wireless
strategy. The economic viability of the strategy is questionable given the
presence of strong entrenched market participants particularly if DISH's
wireless offering fails to provide any meaningful service differentiation from
established competitive offerings. Fitch acknowledges that a wireless network
can potentially provide DISH with further strategic flexibility and enable the
company to diversify its business and capture incremental revenue and cash
Event risks are elevated as the company contemplates additional acquisitions
of spectrum or assets to support the wireless strategy. To that end, the
evolution of DISH's wireless strategy took a step forward as evidenced by the
company's proposal to enter into a multi-faceted, complicated series of
agreements with Clearwire Corporation. Fitch Ratings believes the proposed
transaction is a positive development for DISH, but could also pressure its
If the bid for Clearwire is successful, DISH would secure a potential partner
to build and deploy a wireless network. DISH had previously signaled its
preference to participate in 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 has reduced the number of potential entities DISH
can partner with to deploy its wireless network creating an urgency to
establish a partnership with Clearwire. In accordance with the terms of DISH's
proposal, DISH would acquire, among other things, approximately 24% of
Clearwire's wireless spectrum for $2.2 billion and a minimum of 25% of
Clearwire's outstanding common stock.
DISH 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 company's liquidity position is strong and supported by cash and
marketable securities on hand and expected free cash flow generation. Cash
marketable security balances, pro forma for the $1.5 billion senior note
issuance during December 2012, increase to approximately $7.9 billion. Fitch
notes that the company used approximately $700 million in cash to settle
litigation and $450 million to fund a $1 per share special dividend. 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 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 nearly $1 billion of annual
free cash flow during the current ratings horizon while incorporating higher
levels of cash taxes.
Fitch believes the company's overall credit profile has limited capacity to
accommodate DISH's inconsistent operating performance. While subscriber
metrics remain weak, they have stabilized somewhat when compared to 2011
results. However, DISH struggles 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 operating margins and EBITDA generation. These factors
contributed 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%.
Additional 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
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
credit-neutral manner. In addition operating metrics, in particular subscriber
additions, ARPU growth and EBITDA margins will need to begin to trend
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 5x without a clear strategy to
de-lever the company's balance sheet.
Fitch has affirmed the following ratings with a Negative Rating Outlook:
DISH Network Corporation
--IDR at 'BB-'.
DISH DBS Corporation
--IDR at 'BB-';
--Senior unsecured notes at 'BB-'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
investors. The issuer did not participate in the ratings process, or provide
additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies
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