OREANDA-NEWS. Fitch Ratings has assigned a 'BB-' rating to CCO Holdings, LLC's (CCOH) $1.5 billion issuance of senior unsecured notes due 2024. The ratings are on Positive Watch.

Net offering proceeds are expected to initially be used to repay revolver borrowings ($273 million outstanding as of Dec. 31, 2015). Remaining proceeds will be used for one or more of the following: 1) repurchase or redeem a portion of CCOH's outstanding $600 million of 7% senior notes due 2019 and $750 million of 7.375% senior notes due 2020, and 2) for general corporate purposes, including funding a portion of any incremental cash proceeds related to Charter Communications, Inc.'s (Charter) previously announced merger transaction with Time Warner Cable, Inc. (TWC), whereby TWC shareholders elect to receive $115 per share in cash rather than $100 per share. Any redemption or repurchase of the notes would not take place until after any such cash elections were determined and funded.

On May 23, 2015, Charter announced a merger with TWC for total consideration as of Feb. 4, 2016 of $203.28 per share, providing a total valuation for TWC of $80.1 billion. The offer consists of a combination of cash and Charter stock totaling $58.4 billion for all outstanding TWC shares. TWC shareholders have two options for the split between cash and Charter common stock: 1) $100.00 cash and 0.5409 shares of Charter common stock for each share of TWC common stock or 2) $115.00 cash and 0.4562 shares of Charter common stock for each share of TWC common stock. If shareholders choose the latter option, Charter will use net proceeds from today's issuance. If Charter requires additional liquidity to satisfy cash funding needs for TWC shareholders, CCOH has committed financing in place for $5.0 billion of unsecured debt.

Fitch placed CCOH and Charter Communications Operating, LLC's (CCO) 'BB-' IDRs on Rating Watch Positive following the April 2015 announcement of the acquisition of Bright House Networks (Bright House) from Advance/Newhouse Partnership (A/N). The Bright House acquisition is valued at $11.1 billion as of Feb. 4, 2016. Following the announcement that Comcast Corporation and TWC had terminated their merger agreement, on May 18, 2015 Charter and A/N reaffirmed their commitment to complete the Bright House acquisition under the same economic and governance terms. CCOH and CCO are indirect wholly owned subsidiaries of Charter.

Fitch views both transactions positively and believes they will strengthen Charter's overall credit profile. Fitch anticipates that Charter's total leverage, pro forma for both the TWC merger as it is currently structured and the Bright House acquisition, would be under 5.0x at closing. Integration risks are elevated, and Charter's ability to manage the integration process and limit disruption to the company's overall operations is key to the success of the transactions.

On a pro forma basis the combined company will serve 24 million customer relationships and become the second largest cable multiple system operator in the country. Pro forma revenues totalled approximately $36 billion during 2014 and EBITDA was approximately $13 billion. Charter's operating strategies are having a positive impact on the company's operating profile resulting in a strengthened competitive position. The market share-driven strategy, which is focused on enhancing the overall competitiveness of Charter's video service and leveraging its all-digital infrastructure, is improving subscriber metrics, growing revenue and ARPU trends, and stabilizing operating margins.

Resolution of the Rating Watch will largely be based on Fitch's review of Charter's ultimate capital structure including assignment of potential equity credit to the convertible preferred partnership units and an assessment of the risks associated with Charter's ability to integrate the new cable systems from TWC and Bright House.

KEY RATING DRIVERS

All three entities regularly produce strong levels of free cash flow (FCF) that provide the company with substantial financial flexibility. Charter management stated that, in the short term, they will use FCF to meet existing and planned amortization, which along with EBITDA improvement is expected to lower leverage by 0.6x annually. They also stated that there are no short-term plans for shareholder friendly activities.

RATING SENSITIVITIES

Positive rating actions would be contemplated given the following:

--The TWC merger and the Bright House acquisition go forward as total leverage is expected to be below 5.0x;

--If 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 strategy;

Fitch believes negative rating actions would likely coincide given the following:

--A leveraging transaction or the adoption of a more aggressive financial strategy 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.

LIQUIDITY

Fitch regards Charter's liquidity position and overall financial flexibility as satisfactory given the rating category. Charter's financial flexibility will improve in step with the growth of free cash flow generation. Charter generated $519 million of free cash flow (FCF) during the year ended Dec. 31, 2015. FCF has been increasing due primarily to a decrease in capital expenditures driven by the completion of Charter's transition to all digital in 2014. The company's liquidity position is primarily supported by $961 million of borrowing capacity from its $1.3 billion revolver and anticipated free cash flow generation. Commitments under the company's revolver will expire in April 2018. Fitch notes that the revolver will increase to $3.0 billion as part of the TWC and Bright House transactions.

Charter's leverage as of the LTM ended Dec. 31, 2015 was 4.1x (excluding the debt issued by CCOH Safari, LLC, CCO Safari II, LLC and CCO Safari III, LLC that is currently in escrow.) Charter's total leverage target remains unchanged ranging between 4x and 4.5x. Fitch recognizes that a large portion of the TWC transaction will involve senior secured debt, both existing at TWC and new issuance, including approximately $22.5 billion of existing TWC senior secured debt that will be rolled into CCO and will have equal and ratable security with all first lien debt (existing Charter and TWC debt).

Charter recently stated that it expects to maintain a senior leverage target of 3.5x following the completion of the TWC and Bright House transactions. Depending on the ultimate capital structure, a one or two notch upgrade of Charter's IDR and existing ratings could be possible provided that pro forma senior secured leverage is at or below 4.0x and total leverage does not exceed 5.0x.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following rating:

CCO Holdings, LLC
--Senior unsecured notes 'BB-'; Rating Watch Positive.

Fitch maintains the following ratings on Rating Watch Positive:

CCO Holdings, LLC
--Long-term IDR 'BB-';
--Senior unsecured 'BB-'.

Charter Communications Operating, LLC
--Long-term IDR 'BB-';
--Senior secured 'BB+'.

CCOH Safari, LLC
--Senior unsecured 'BB'.

Fitch maintains the following issue ratings:

CCO Safari II, LLC
--Senior secured 'BBB-'.

CCO Safari III, LLC
--Senior secured 'BBB-'.