Fitch Affirms Charter Communication's IDR at 'BB-'; Outlook Stable
CHICAGO -- February 11, 2013
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.
KEY RATING DRIVERS:
--Acquisition of Bresnan Broadband Holdings, LLC (Bresnan) neutral to
--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
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
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
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
--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
--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+'.
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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Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
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