Fitch Downgrades Cablevision's IDR to 'B+'; Outlook Negative
The downgrade of CVC's IDR is due to the leveraging nature of the Altice N. V. (Altice) acquisition of CVC (the transaction) for an enterprise value of $17.7 billion, including $8.4 billion of existing debt. Pro forma leverage for the transaction increases to 8.6x from 5.3x at March 31, 2016, excluding anticipated cost synergies. Pro forma leverage increases to 6.9x after considering realization of $450 million in cost synergies. Fitch expects EBITDA growth through cost synergy realization will likely be the main driver of leverage reduction. Although Altice stated it is targeting leverage between 5x and 5.5x for both CVC and Suddenlink (see below) on a combined basis, Fitch expects CVC will delever only to the mid-6x range over the next 24 months. We believe CVC will meet its stated leverage target only if it achieves the majority of Altice's anticipated synergies, which total $1.05 billion (consisting of $900 million in cost synergies and $150 million in capex synergies). In addition, Fitch expects that Cablevision's free cash flow generation as a percentage of debt will range in the low single digits during the rating horizon.
CVC will become an unrestricted subsidiary of Altice and will maintain a separate capital structure. Transaction financing consists of $6 billion of incremental debt assumed by CSCH and $3.3 billion of equity. Approximately 70% of the equity financing was contributed by Altice and the remaining 30% by BC Partners and Canada Pension Plan Investment Board. In October 2015, Altice's escrow subsidiary (Neptune Finco Corp.) also issued an additional $2.6 billion of debt that will be used to refinance $2 billion of outstanding term loans at CSCH and $480 million of term loans at Newsday, LLC, a CSCH subsidiary. The escrow subsidiary will merge into CSCH upon closing of the transaction and CSCH will assume the debt obligations.
The Negative Outlook reflects uncertainty around the viability and timing of the potential synergies to drive EBITDA growth over the next 18 to 24 months, which will likely be the main source of deleveraging for CVC.
The transaction represents Altice's second acquisition of a U. S. cable operator in the last six months. In December 2015, Altice officially entered the U. S. market after spending $9.1 billion to acquire a 70% ownership stake in Suddenlink Communications (Suddenlink), the seventh largest U. S. cable operator with approximately 1.5 million subscribers.
KEY RATING DRIVERS
--The acquisition of CVC and Suddenlink by Altice will create the fourth largest MVPD operator in the U. S.;
--Although Altice has demonstrated its ability to achieve synergy targets at previous acquisitions, we believe there is significant execution risk given that: 1) Altice is a new entrant to the U. S. market, 2) Altice has presented sizable synergies that may be difficult to realize entirely, and 3) it will not have contiguous operations that would benefit from scale efficiencies;
--Excluding synergies, pro forma leverage for the transaction increases to 8.6x from 5.3x at March 31, 2016.
Significant Execution Risk: Altice's ability to manage the restructuring process and limit disruption to the company's overall operations is key to the success of the transaction. Altice's management anticipated $900 million of cost synergies after its initial announcement of the transaction, but later clarified that it expects to achieve $450 million of cost savings in the medium term. Fitch expects CVC to achieve $450 million of its anticipated cost synergies over a three-year period. However, we believe there is significant execution risk in achieving the remaining $450 million of the aggregate $900 million. As such, Fitch has not incorporated any additional cost synergies into its forecast beyond the initial $450 million.
In order to achieve its synergies, Altice will focus on eliminating excess corporate costs and on continuing investments in CVC's network to improve the quality of service offerings provided and significantly reduce network and operational costs of the business. CVC's dense network should allow the company to extract efficiencies in a quicker manner. Altice also believes it can eliminate excess IT, billing system and software costs through the combination of Cablevision and Suddenlink's operations.
Intense Competitive Environment: Video and voice subscriber declines are largely attributed to intense competition and evolving media consumption patterns. Verizon Communications Inc. (Verizon) has been a source of significant competition for CVC, as Verizon's fiber network passes a significant portion of CVC's footprint. Additionally, CVC faces competition from Frontier Communications Corp. (Frontier) in its Connecticut footprint and from emerging OTT providers such as Netflix and Amazon. com, Inc.'s 'Prime'. Promotional package offerings from Verizon and Frontier will continue to pressure CVC's ability to maintain its current subscriber base and ARPU growth. However, network investments by Altice may position Cablevision to compete more effectively against its competitors.
Fitch's key assumptions within the rating case for CVC include:
--CVC achieves $450 million of its anticipated cost synergies related to the acquisition over a three-year period. Specifically, the company realizes 67% of the $450 million annualized cost synergies within 18 months of the close of the transaction;
--CVC revenue growth in the low single digits, reflecting the maturity and high penetration rate of the company's services;
--FCF margin in the low single digits during 2016 and 2017 as FCF is hampered by $225 million of restructuring costs and higher interest expense. Margins are expected to increase to the mid-single digits starting in 2018 as synergies are fully realized.
Future developments that may, individually or collectively, lead to a stabilization of the rating include:
--Sustained reduction of leverage to below 6.5x;
--Clear indications that pricing and cost reduction initiatives are producing desired revenue growth acceleration and ARPU growth such that EBITDA margins approach the low - to-mid-30s;
--Cablevision demonstrating that its operating profile will not materially decline in the face of competition from other cable operators and against OTT providers in the evolving media landscape.
Negative ratings actions would likely coincide with:
--If the company does not present a credible deleveraging plan and leverage remains above 6.5x after an 18-24-month timeframe;
--The company is unable to sustain FCF margins in the mid-single digits;
--EBITDA margins remain weak compared to peer group or as a result of CVC's inability to realize synergies.
Fitch considers CVC's liquidity position and overall financial flexibility to be adequate given the current rating. Liquidity is supported by cash on hand totalling $934 million as of March 31, 2016 and $1.4 billion of available borrowing capacity from CSCH's $1.5 billion revolver expiring April 2018. Following the close of the transaction, the current revolver will be replaced with a $2 billion revolver expiring October 2020.
The $2 billion of secured term loans currently outstanding at CSCH will be repaid at the close of the transaction and CSCH will assume $3.8 billion of secured term loans due 2020 that were previously issued at Altice's escrow subsidiary. The new term loans and revolver eliminate the financial covenants under the old credit facility. Going forward, the only financial covenant will be under the new revolver that limits net senior secured leverage to no more than 5x. The financial covenant will be tested only if there are outstanding borrowings under the new revolver.
Pro forma for the closing of the transaction and excluding $1.2 billion of monetized indebtedness outstanding at March 31, 2016, Fitch estimates principal amounts of $38 million and $938 million mature in 2016 and 2017, respectively. Approximately $1.6 billion matures in 2018. Outside of $38 million in term-loan amortization payments annually, Fitch expects CVC and CSCH to refinance any upcoming maturities.
FULL LIST OF RATING ACTIONS
Fitch has removed the ratings from Negative Watch and downgraded the following:
Cablevision Systems Corporation (CVC)
--IDR to 'B+' from 'BB-';
--Senior unsecured notes to 'B-/RR6' from 'B+/RR5'.
CSC Holdings, LLC (CSCH)
--IDR to 'B+' from 'BB-';
--Senior unsecured notes to 'B+/RR4' from 'BB/RR2'.
Fitch has removed the ratings Negative Watch and affirmed the following:
--Senior secured credit facility at 'BB+/RR1.
The Rating Outlook is Negative.
At the close of the transaction, Fitch anticipates rating the debt held in escrow when it is assumed by CSCH and will remove the ratings assigned to the old credit facility when it is refinanced.