OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' Issuer Default Rating (IDR) assigned to DISH Network Corp. (DISH) and its wholly owned subsidiary DISH DBS Corp. (DDBS). The Rating Outlook has been revised to Negative from Stable. Fitch also affirmed the 'BB-/RR4' issue ratings assigned to DDBS' senior unsecured notes and assigned an expected rating of 'B+(EXP)/RR5' to DISH's $2.5 billion convertible note offering. The expected rating will be converted to a final rating once the final details of the issuance are confirmed through a public filing of the indenture.

The Negative Rating Outlook reflects pro forma leverage of 5.4x that is elevated above the negative rating trigger of 5.0x following DISH's $2.5 billion issuance of convertible notes. The initial purchaser of the convertible notes has the option to purchase an additional $500 million within 30 days, which would increase pro forma leverage to 5.6x as of June 30, 2016. Fitch has treated the convertible notes as 100% debt in our analysis.

Proceeds from the offering are expected to be used for strategic transactions, including spectrum-related transactions that will support the company's unspecified wireless strategy. Fitch believes DISH has the ability to reduce leverage below 5.0x over the next 18 - 24 months, but revised the Rating Outlook to Negative due to the absence of capacity for incremental debt and limited room for further deterioration of DISH's operating profile. In the event DISH refinances its upcoming maturities and does not focus on debt reduction, a downgrade will be warranted.

Fitch previously stated that it will treat DISH's spending at the TV broadcast spectrum incentive auction as event risk in the rating, and that the agency will evaluate DISH's capacity to fund any potential liability with cash in excess of liquidity needs, if necessary, at the time the payment comes due. However, the prefunding of cash to use for the spectrum auction eliminates any capacity DISH has for incremental debt within Fitch's expectations for the current rating.

KEY RATING DRIVERS

Ratings Reflect Weak Trends: Fitch believes the company's overall credit profile has limited capacity to accommodate DISH's inconsistent operating performance. DISH reported its largest quarterly net subscriber loss of 281,000 in the second quarter of 2016. While subscriber metrics remain weak, average revenue per user (ARPU) increased 2.5% during the first half of 2016 versus the prior period as a result of programming cost increases. However, ARPU growth has slowed versus 4.3% during the first half of 2015 as DISH's pay-tv programming package mix changes to accommodate an increase in Sling TV subscribers.

Mature U. S. Service Offering: Additional rating concerns center on the following: DISH's ability to adapt to the evolving competitive landscape; DISH's lack of revenue diversity and narrow product offering relative to its cable multi-system operator (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 focuses on its maturing video service offering and lacks growth opportunities relative to its competition. Although Sling TV provides a source of growth versus the traditional pay-tv business, the Sling TV subscriber base is small and is unlikely to contribute meaningfully to DISH's operations in the near term.

Wireless Strategy Poses Event Risk: The current ratings take into consideration the lack of transparency of DISH's wireless strategy, and the potential capital requirements and execution risk associated with that strategy. Fitch acknowledges the significant asset value and strategic optionality associated with DISH's investment in wireless spectrum. DISH's efforts to transform though various wireless initiatives remain in a development stage, partly due to the numerous set-backs the company has experienced as it endeavors to engage another wireless carrier seeking a partnership, acquisition or network-sharing agreement. The strategic importance of a wireless broadband service option has not diminished and, as such, Fitch expects DISH will likely continue its efforts to pursue a lower risk strategy by engaging with an existing national wireless service provider.

Fitch notes that the terms of its wireless spectrum assets require the company to build out a portion of the spectrum coverage area, which can pressure the company's credit profile.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for DISH include:

--Nominal overall revenue growth generated by slower-than-historical ARPU growth that slightly offsets net subscriber losses;

--EBITDA margins in 2016 and 2017 are expected to be relatively unchanged from the 19.8% recorded in 2015, driven by SG&A cost containment efforts that somewhat offset higher programming costs;

--Assuming DISH repays upcoming debt maturities with FCF and cash on hand, leverage declines to under 5.0x over the next 18-24 months.

As of second quarter 2016, Fitch believes DISH only has capacity in the current rating to spend approximately $4 billion on spectrum-related purchases over the next two to three years.

RATING SENSITIVITIES

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 and maintain leverage below 5.0x.

Fitch believes a 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 (FCF), maintain adequate liquidity to meet ongoing operational needs, erode operating margins, and increase leverage higher than 5x without a clear strategy to deleverage the company's balance sheet. Additional scenarios that may have a potential rating impact, including any spectrum-related purchases beyond the current $4 billion of capacity, will be evaluated as they are disclosed.

LIQUIDITY

The company's current liquidity position is adequate for its ongoing operations. Overall, the company's liquidity position and financial flexibility is supported by expected FCF generation. The company also benefits from a reasonable maturity schedule, as 28% of the company's outstanding debt is scheduled to mature through 2020 but no more than approximately 8% in any one year. Upcoming material maturities total $900 million and $1.2 billion during 2017 and 2018, respectively.

DISH had a total of approximately $3.5 billion of cash and marketable securities (current portion) as of June 30, 2016. The majority of DISH's consolidated cash and marketable securities balances were held at DISH. The company's stated minimum cash requirement of $1 billion and FCF generation mitigate the risk caused by the lack of a revolving credit facility.

DISH's FCF (defined as cash flow from continuing operations less capital expenditures and dividends) declined approximately 13% as of the LTM period ended June 30, 2016 to $1.2 billion when compared to the same period during 2015. DISH's capital intensity remained relatively stable in the 7% to 8% range in 2015. Capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment, and include capitalized interest related to FCC authorizations.

Limited Bondholder Protections: The DDBS indentures provide bondholders very limited protections against increasing leverage and moving cash to its parent, DISH, to fund investments. These investments include any potential wireless investment or initiative, leaving DDBS bondholders without recourse to the assets and cash flows generated by such investments (assuming the absence of legal/guaranty considerations). The indentures include a debt incurrence test of 8x leverage and in most cases restricted payments are permitted provided leverage is below 8x and no event of default exists.