Fitch Affirms DISH's IDR at 'BB-'; Removes from Rating Watch Negative; Outlook Stable
Fitch's rating action follows the decision made by DISH's bidding entities to relinquish a portion of spectrum related to winning bids in the Advanced Wireless Services 3 (AWS-3) auction for re-auction by the FCC. The FCC will apply the funds already on deposit and an additional \\$413 million of cash from the bidding entities toward the payment of the gross winning bids for the remaining licenses, which total approximately \\$9.9 billion and cover approximately 6.6 billion MHZ-POPs. The payment made to the FCC also included an additional amount related to a 15% penalty for returning the spectrum licenses. When the spectrum is re-auctioned, the bidding entities and DISH (as a guarantor) will still be liable for paying the difference between the price paid at the re-auction and the original gross bid made by the bidding entities. The timing of the re-auction is uncertain, but considering the FCC's primary focus is on the TV Broadcast Spectrum Incentive auction, Fitch expects the re-auction to take place following the Broadcast Incentive auction.
DISH utilized cash from its balance sheet to supply the \\$413 million loan to the bidding entities. Although DISH continues to have limited flexibility within the current ratings, Fitch believes the company's FCF generation provides adequate coverage for the company to meet near-term minimum liquidity requirements. Although the maximum re-auction liability could be as high as the original bidding credit itself, Fitch believes that is unlikely considering it would assume no one would bid on the spectrum licenses. As of second-quarter 2015, Fitch believes DISH has minimal room in the current rating to accommodate any incremental debt related to the remaining re-auction liability if needed. Fitch will treat this contingent liability as event risk in the rating, and 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.
The company's IDR and debt securities were placed on Rating Watch Negative on Aug. 18, 2015 to reflect the uncertainty surrounding DISH's funding strategy and potential negative effect on its credit profile arising from the announcement that the FCC voted to deny \\$3.3 billion in bidding credits previously awarded to DISH's bidding entities in the AWS-3 auction. DISH's cash and marketable securities (current portion) totalled approximately \\$1.1 billion at June 30, 2015, which provided limited flexibility to fund the payment in the absence of the discount and maintain the company's stated \\$1 billion minimum cash requirement.
Northstar, SNR and their investors (including DISH) are still eligible to participate in future auctions, including any re-auction of the AWS-3 licenses retained by the FCC. Fitch does not expect DISH or its bidding entities to participate in the re-auction of the relinquished spectrum licenses if held in the near term, considering the bidding entities paid a penalty to relinquish the licenses and would have to pay a minimum of the original gross bid if they made winning bids.
KEY RATING DRIVERS
Wireless Strategy Poses Event Risk: The current ratings take into consideration the lack of visibility into 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. However, in Fitch's view, DISH would need to meaningfully differentiate its wireless services in order for the strategy to successfully diversify its revenues, and to provide for potential cash flow growth. An offering similar to other wireless operators' services would likely struggle to gain traction, given the maturing wireless market and entrenched national operators. 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.
DISH's efforts to transform though various wireless initiatives remain in a development stage. The company's strategy has experienced numerous set-backs as the company endeavors to engage another wireless carrier seeking a partnership, acquisition or network-sharing agreement. Event risks remain elevated as the company contemplates additional acquisitions of spectrum or assets to support the wireless strategy. The strategic importance of a wireless broadband service option has not diminished and, as such, Fitch expects DISH will likely continue its efforts to engage an existing national wireless service provider.
Total debt outstanding was approximately \\$13.8 billion as of June 30, 2015. DISH's leverage totaled 4.6x for the latest 12 month (LTM) period ended June 30, 2015, a decrease from 4.9x and 4.8x at year-end 2014 and 2013, respectively. The cash proceeds from the company's incremental debt issuances have largely remained on its balance sheet, and supported DISH's wireless spectrum purchase in first-quarter 2015.
Ratings Reflect Weak Trends: Fitch believes the company's overall credit profile has limited capacity to accommodate DISH's inconsistent operating performance as the company struggles to transform its branding strategy from a value-oriented service provider to a technology-focused provider targeting high-value subscribers. While subscriber metrics remain weak, average revenue per user (ARPU) has benefited from programming cost increases, higher hardware-related revenue and increased advertising revenue. ARPU increased 4.3% for the first six months of 2015 versus the prior period.
Fitch's key assumptions within the rating case for DISH include nominal overall revenue growth generated by slower subscriber and ARPU growth. EBITDA margins in 2015 and 2016 are expected to decline slightly from the 20.1% recorded in 2014, assuming that higher programming costs are offset somewhat by SG&A cost containment efforts.
Although Fitch believes it is unlikely over the near term, a positive rating action will likely coincide with the company articulating a wireless strategy that is executed in a credit-neutral manner and committing to a leverage target below 4x.
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 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. A potential negative rating action will be evaluated, if necessary, when there is clarity around the re-auction rules, timing, and final results. Additional scenarios that may have a potential rating impact will be evaluated as they are disclosed.
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 free cash flow (FCF) generation. The company also benefits from a reasonable maturity schedule, as 37% of the company's outstanding debt is scheduled to mature through 2019 but no more than approximately 10% in any one year. In 2016, \\$1.5 billion matures.
DISH had a total of approximately \\$1.1 billion of cash and marketable securities (current portion) as of June 30, 2015. 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) generation rose approximately 73% as of the LTM period ended June 30, 2015 to \\$1.6 billion when compared to the same period during 2014. DISH's capital intensity remained relatively stable in the 8% to 9% range in 2014. Capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
DISH Network Corporation
--IDR at 'BB-'.
DISH DBS Corporation
--IDR at 'BB-';
--Senior unsecured notes at 'BB-/RR4'.
The Rating Outlook is Stable.