Fitch Rates CCO Holding's New Senior Notes 'BB-'; Ratings Placed on Positive Watch
OREANDA-NEWS. Fitch Ratings has assigned a 'BB-' rating to CCO Holdings, LLC's (CCOH) proposed issuance of $1 billion of senior unsecured notes due 2026. The ratings have been placed on Positive Watch.
Net offering proceeds are expected to be used to repurchase or redeem a portion of CCOH's outstanding $600 million of 7% senior notes due 2019 (7% senior notes) and $750 million of 7.375% senior notes due 2020 (7.375% senior notes) and pay related fees and expenses. CCOH intends to use the remaining portion of net proceeds from its $1.7 billion of 5.875% senior unsecured bond issuance in February 2016, which is currently being held as cash and cash equivalents, to repurchase or redeem a portion of CCOH's outstanding 7% senior notes, 7.375% senior notes and outstanding $1.5 billion of 6.5% senior notes due 2021 (6.5% senior notes) and pay related fees and expenses and for general corporate purposes. Additional uses could include funding a portion of potential incremental cash needs 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 6.5% notes would not take place until after the cash elections and required funding amount was determined.
Charter initially used a portion of net proceeds from the February 2016 offering to pay down amounts outstanding under its revolver ($273 million as of Dec. 31, 2015).
On May 23, 2015, Charter announced a merger with TWC for total consideration as of April 7, 2016 of $208.72 per share, providing a total valuation for TWC of $80.9 billion. The offer consists of a combination of cash and Charter stock totaling $60.0 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 has the financial flexibility, which may include a portion of the net proceeds from February's issuance, to fund the increased cash needs. 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 $11.4 billion as of April 7, 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 25 million customer relationships and become the second largest cable multiple system operator in the country. Pro forma Fiscal Year 2015 revenues and EBITDA totalled approximately $37.4 billion and $13.2 billion, respectively.
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.
Due to the uncertainty surrounding approval of the TWC and Bright House transactions, Fitch's forecast reflects Charter on a standalone basis.
Fitch's key assumptions within the rating case for Charter include:
--Low-to-mid single digit cable revenue growth highlighted by continued high-speed data and commercial service revenue growth.
--EBITDA margins remain flat reflecting ARPU growth from subscribers taking more advanced video services and higher speed data service tiers, offset by increased programming costs and spending to enhance customer service and products.
--Fitch estimates Charter will generate $400 million of FCF in 2016, slightly less than the anticipated $1 billion to $1.2 billion of FCF during 2017 and 2018, respectively. FCF in 2016 is negatively impacted by additional interest expense related to debt issued by CCOH Safari, LLC, CCO Safari II, LLC, and CCO Safari III, LLC (collectively the Safari Entities) to proactively fund the TWC and Bright House transactions.
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 with 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.
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 FCF during the year ended Dec. 31, 2015. Although FCF had been increasing due primarily to a decrease in capital expenditures driven by the completion of Charter's transition to all digital in 2014, 2015 was negatively impacted by interest expense associated with Safari Entities debt. The company's liquidity position includes cash of $5 million, excluding cash held in escrow at Safari Entities, and is supported by $961 million of borrowing capacity from its $1.3 billion revolver and anticipated FCF 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 last 12 months ended Dec. 31, 2015 was 4.1x, excluding the debt issued by Safari Entities. Charter's total leverage target remains unchanged, ranging between 4x and 4.5x, and will remain unchanged following the completion of the transactions. Fitch recognizes that a large portion of the TWC transaction will involve senior secured debt, both at TWC and the Safari Entities, including approximately $22.5 billion of existing TWC senior secured debt. All existing TWC and Safari Entities first-lien debt will be rolled into CCO and will have equal and ratable security with all existing Charter first lien debt.
Charter recently stated it expects first lien leverage of 3.5x following the completion of the 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 4x and total leverage does not exceed 5x.
Charter proactively extended its maturity profile and only 5% of outstanding debt matures before 2019, including $93 million and $102 million during 2016 and 2017, respectively. Fitch believes that Charter has the financial flexibility to retire near term maturities with cash on hand and future FCF.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
CCO Holdings, LLC
--Senior unsecured notes 'BB-'; Placed on Rating Watch Positive.
The following ratings are currently 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'.
The current Rating Outlook for the following ratings is Stable:
CCO Safari II, LLC
--Senior secured 'BBB-'.
CCO Safari III, LLC
--Senior secured 'BBB-'.