|By Business Wire||
|August 11, 2014 11:29 AM EDT||
Fitch Ratings has affirmed the 'BB-' Issuer Default Rating (IDR) assigned to Cablevision Systems Corporation (CVC) and its wholly owned subsidiary CSC Holdings, LLC (CSCH). In addition, Fitch has affirmed specific issue ratings assigned to CSCH and upgraded CVC's senior unsecured notes to 'B+' as outlined below.
The Rating Outlook for CVC and CSCH's ratings has been revised to Stable from Negative.
As of June 30, 2014, CVC had approximately $9.9 billion of debt outstanding on a consolidated basis.
KEY RATING DRIVERS
--The company's operating strategies and investments, coupled with pricing actions, have translated into an improving operating profile as evidenced by expanding cable segment EBITDA margins and ARPU growth;
--The Stable Outlook incorporates Fitch's expectation that CVC's credit profile will continue to strengthen in step with its improving operating profile and its ability to generate meaningful levels of free cash flow (FCF);
--Fitch expects ongoing initiatives and investments to improve operational efficiency and customer experience, together with pricing actions, will modestly improve core cable segment EBITDA margins during the rating horizon, which taken together with opportunistic debt reduction supports the current ratings;
--Fitch expects CVC will maintain a conservative approach to capital allocation as the company's operating profile continues to strengthen.
The Stable Outlook incorporates Fitch's belief that CVC's credit profile, while weakly positioned within the current rating, will continue to strengthen in step with anticipated improvement of its operating profile. This is the result of its attempts to offset rising programming and employee compensation costs with price increases and operational efficiency initiatives aimed at accelerating revenue growth and improving EBITDA margins. Expected EBITDA margin improvement coupled with normalizing capital expenditures will enhance the company's ability to deliver stronger free cash flow (FCF) metrics during 2014 and resulted in leverage that is within expectations for the current rating category.
Programming cost inflation represents a significant and likely permanent shift in CVC's cost structure. CVC expects high single-digit programming cost inflation will remain into 2014. Positively, in addition to ongoing pricing initiatives put in place during the first half of 2013, CVC's continuing operating cost initiatives partially offset the cost inflation by driving costs out of other parts of its cost structure through reducing the transaction volume of its business and improving operational efficiencies. These actions have resulted in CVC's LTM EBITDA margin expanding 307 basis points to 28.9% during second-quarter 2014 (2Q'14) relative to the same period last year, excluding discontinued operations. The company anticipates tempered EBITDA growth during the second half of 2014 but expects growth in the mid-to-high single digits for the full year in 2014. However, Fitch does not believe that the operating margin of CVC's core cable segment will return to historical levels and CVC's EBITDA margins continue to lag its peer group.
CVC anticipates capex will remain elevated at a level similar to 2013. Fitch expects capex priorities will continue to include the expansion of CVC's Wi-Fi network overlay both in and out of the home during 2014. Additionally, the company has upgraded its cable head-ends to facilitate the launch of its Multi-Room DVR service - CVC's remote storage or cloud-based DVR service. Nonetheless Fitch anticipates the improvements in CVC's operating profile will allow the company to offset higher, but stabilizing, capital spending and enable the company to generate growing levels of FCF during the rating horizon. Fitch believes CVC's FCF margin will approximate 3% of revenues as of year-end 2015 and grow to 5% by year-end 2016.
CVC's financial strategy is centered on opportunistically reducing debt and improving its credit profile. The company utilized cash from asset sales and litigation settlements to reduce outstanding debt and ended 2Q'14 with consolidated leverage of 5.4x, which is an improvement from 6.0x as of June 30, 2013 (excluding discontinued operations). Fitch expects initiatives to improve operational efficiency and ongoing pricing actions will expand EBITDA margins modestly during 2014 and 2015. The operating initiatives and debt reduction should strengthen credit protection metrics. Fitch believes CVC's leverage metric will range between 5.3x and 5.5x at year-end 2014 and approach 5.2x as of year-end 2015.
Fitch considers CVC's liquidity position and overall financial flexibility to be adequate given the current rating. The company's liquidity position is supported by cash on hand totaling $907 million as of June 30, 2014 and available borrowing capacity from CSCH's $1.5 billion revolver expiring April 2018. Fitch expects CVC's financial flexibility will strengthen in line with its improving operating profile and FCF generation.
CVC extended its maturity profile and reduced the volume of maturities between 2014 and 2017 after refinancing its credit facility in April 2013. The company also reduced its annual term loan amortization payments after issuing $750 million of senior notes due 2024 to prepay a portion of its term loan B in May 2014. Scheduled maturities (excluding collateralized monetization transactions) consist of $32 million during the remainder of 2014, $64 million during 2015 and $568 million in 2016.
CVC's conservative posture related to its share repurchase program, while maintaining a consistent dividend is positive for the company's credit profile. The company did not repurchase any shares during 2013 or in the first half of 2014 (versus $188.6 million in 2012). As of June 30, 2014, CVC had $455.3 million of availability remaining under its stock repurchase program.
The upgrade of CVC's senior unsecured debt is supported by stronger recovery prospects through an improving credit profile and a capital structure less reliant on secured debt.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Further strengthening of the company's credit profile and a sustained reduction of leverage to below 4.5x;
--Clear indications that pricing and cost reduction initiatives are producing desired revenue growth acceleration and EBITDA margin expansion;
--Positive FCF generation exceeding 5% of consolidated revenues;
--FCF as a percentage of adjusted debt with equity credit exceeding 4%;
--Cablevision demonstrating that its operating profile will not materially decline in the face of competition.
Negative ratings actions would likely coincide with:
--The company's inability to realize the expected benefits of its operating strategies and strengthen its operating profile. Specifically, Fitch will be looking for mid-single-digit ARPU growth, cable segment operating margins returning to the mid 30% range and positive FCF generation;
--Fitch's belief that CVC's consolidated leverage will remain above 5.5x in the absence of a clear path to de-lever the company will likely spur a negative rating action;
--Although not anticipated in the near term, the re-initiation of aggressive share repurchases while leverage remains elevated.
Fitch has affirmed the following ratings with a Stable Outlook:
Cablevision Systems Corporation
--IDR at 'BB-'.
CSC Holdings, LLC
--IDR at 'BB-';
--Senior secured credit facility at 'BB+';
--Senior unsecured debt at 'BB'.
Fitch has upgraded the following ratings:
Cablevision Systems Corporation
--Senior unsecured debt to 'B+' from 'B-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating Telecom Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
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