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Fitch Rates Charter's Sr. Secured Notes 'BBB-'; Outlook Stable
June 27, 2017 / 1:58 PM / 3 months ago

Fitch Rates Charter's Sr. Secured Notes 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, June 27 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Charter Communications Operating, LLC's (CCO) proposed issuance of $1.5 billion of senior secured notes. CCO is an indirect, wholly owned subsidiary of Charter Communications, Inc. (Charter). CCO's Issuer Default Rating (IDR) is currently 'BB+' with a Stable Outlook. The company is expected to use net proceeds to pay related fees and expenses and for general corporate purposes, including potential buybacks of Class A common stock of Charter or common units of Charter Communications Holdings, LLC (CCH), a subsidiary of Charter. As of March 31, 2017, Charter had $1.9 billion available under its Class A common stock buyback program, an amount that excludes any potential buybacks of CCH common units. Pro forma for the proposed issuance, as well as debt issuances in April 2017 and subsequent note repurchases, Charter had approximately $63.3 billion of debt outstanding as of March 31, 2017, including $47.4 billion of senior secured debt. Today's issuance is in line with Fitch's expectation that Charter will issue debt using additional debt capacity created primarily through EBITDA growth. Proceeds from future prospective debt issuances issued under additional debt capacity created are expected to be used for investment in the business, accretive acquisitions and shareholder returns. Charter management has stated it plans to target the low end of its target leverage range of 4x to 4.5x. KEY RATING DRIVERS M&A Activity Credit-Positive: In May 2016, Charter completed its merger with Time Warner Cable and acquisition of Bright House Networks. Fitch continues to view these transactions positively and believes they strengthen Charter's overall credit profile. Fitch estimates that on a pro forma basis for the last 12 months (LTM) ended March 31, 2017, including a full year of the transactions and recent debt issuances and redemptions, total leverage was 4.3x while senior secured leverage was 3.2x. Integration Key to Success: Charter's ability to continue managing the simultaneous integration of two transactions and limit disruption to its overall operations is critical. Charter is also managing the transition to all-digital services and the introduction of its interactive IP-based video user interface across the TWC and Bright House systems. Similar efforts in their legacy systems boosted ARPU and accelerated growth in revenue, EBITDA margin and FCF. Credit Profile Changes: As of March 31, 2017, Charter served 25.1 million residential customers and is the country's second largest cable multiple-system operator. Pro forma LTM revenue and EBITDA totalled approximately $40.5 billion and $14.7 billion, respectively. Charter's pro forma total leverage and senior secured leverage have declined since peaking at 4.4x and 3.5x, respectively, at June 30, 2016. The decline was driven primarily by EBITDA growth as Charter benefited from ongoing operating improvements. Improving Operating Momentum: 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 average revenue per unit (ARPU) trends, and stabilizing operating margins. Debt Capacity Growth: Charter management has stated it plans to target the low end of its target leverage range of 4x to 4.5x. Fitch expects Charter to continue to create additional debt capacity and remain within its target leverage primarily through EBITDA growth. Proceeds from prospective debt issuances under additional debt capacity created are expected to be used for investment in the business, accretive acquisitions and shareholder returns. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: --Mid-single-digit pro forma revenue growth highlighted by continued high-speed data and commercial service revenue growth. --Pro forma EBITDA margin improves as ARPU growth from subscribers taking more advanced video services and higher-speed data service tiers offsets increased programming costs and spending to enhance customer service and products. --Fitch estimates Charter will generate more than $4 billion of FCF in 2017. RATING SENSITIVITIES Positive rating actions would be contemplated given the following: --Integrating TWC and Bright House while limiting disruption in the company's overall operations; --Demonstrating continued progress in closing gaps relative to its industry peers in 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; --Reduction and maintenance of total leverage below 4.0x. Fitch believes negative rating actions would likely occur 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 FCF generation following the completion of the transactions. Charter generated $3.7 billion of FCF during the LTM ended March 31, 2017, and Fitch expects Charter to generate more than $4 billion in 2017. The company's liquidity position at March 31, 2017 includes cash of $2.7 billion and is supported by $2.8 billion of borrowing capacity from its $3 billion revolver, which expires in May 2021, and anticipated FCF generation. Charter's pro forma maturity profile is manageable with less than 10% of outstanding debt maturing before 2020 including $148 million in 2017, $2.2 billion in 2018, and $3.5 billion in 2019. Fitch believes that Charter has the financial flexibility to retire near-term maturities with cash on hand and future FCF. Contact: Primary Analyst Jack Kranefuss Senior Director +1-212-908-0791 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Connie McKay Associate Director +1-312-368-3148 Committee Chairperson Bill Densmore Senior Director +1-312-368-3125 Date of Relevant Rating Committee: May 13, 2016. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --No material adjustments have been made that have not been disclosed in public filings of this issuer. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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