CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to DIRECTV Holding LLC's (DTVH) proposed offering of $750 million unsecured notes. DTVH is a wholly owned indirect subsidiary of DIRECTV. Proceeds from the offering are expected to be used for general corporate purposes including a distribution to DIRECTV in support of its share repurchase program and other general corporate purposes. DTVH's issuer default rating is 'BBB-' and the Rating Outlook is Stable. As of Sept. 30, 2012 DTVH had approximately $17.2 billion of debt outstanding.
The notes will be guaranteed on a senior unsecured basis by DIRECTV and DTVH's material domestic subsidiaries. The notes will rank pari passu with DTVH's existing senior unsecured debt (including its senior revolving credit facility). Additionally the guarantees rank equally with the respective guarantor's senior unsecured indebtedness.
The issuance is in line with DIRECTV's overall financial strategy and Fitch's expectations. DIRECTV's financial strategy remains consistent and is focused on returning capital to its shareholders in the form of share repurchases and maintaining a 2.5x long-term leverage target. Consolidated credit protection metrics are aligned with Fitch's expectations and the current rating category. In line with the company's financial strategy, total debt outstanding as of Sept. 30, 2012 increased 27.5% relative to year end 2011 to approximately $17.2 billion. Consolidated leverage increased to 2.29x as of the latest-twelve-month (LTM) period ended Sept. 30, 2012, while leverage increased to 2.4x forma for the issuance.
Through the first nine months of 2012 DIRECTV has repurchased 82 million of its shares for $3.9 billion. As of Sept. 30, 2012 approximately $3.0 billion of capacity remains on the current share repurchase authorization.
Key Rating Drivers
The key rating factors that support the rating include:
--DTVH's size, scale and strong competitive position of DTVH's operations as the second largest multi-channel video programming distributor (MVPD) in the United States with nearly 20 million video subscribers as of Sept. 30, 2012;
--The growth prospects of DIRECTV's Latin American (DTVLA) business segment;
--Additionally the ratings incorporate Fitch's expectation for continued generation of free cash flow (before dividends to DIRECTV) and the company's high level of financial flexibility within the existing ratings category;
--These considerations, along with the DIRECTV's 2.5x long-term leverage target, the DIRECTV guaranty and an operating strategy primarily focused on targeting high-value subscribers and controlling subscriber churn, strongly position the company's credit profile within the current rating.
Fitch believes there is adequate flexibility within the current ratings to accommodate ongoing risks to its business including weak macro-economic trends, increasing programming costs, technology evolution and unrelenting competitive pressures. Notwithstanding its video centric service offering, DTVH has a strong competitive position. However, video services within the United States are a mature product with, in Fitch's opinion, limited revenue and subscriber growth potential.
Based on Fitch's expectation for continued free cash flow (FCF), Fitch believes DIRECTV's overall financial flexibility and liquidity position is strong. Fitch acknowledges that DIRECTV's share repurchase authorization represents a significant use of cash, however Fitch believes that the company has the flexibility to reduce the level of share repurchases should the operating environment materially change in order to maximize flexibility. On consolidated basis, the company generated nearly $2.5 billion of FCF during the LTM period ended Sept. 30, 2012. Fitch anticipates modest free cash flow growth driven by mid-single digit revenue growth along with stable EBITDA margins and consistent capital spending in the range of $2.5 billion annually.
In addition to free cash flow generation the company's liquidity position is supported by the collective available borrowing capacity under its $2.5 billion revolver (Consisting of a $1.0 billion revolving credit facility maturing Feb. 2016 and a $1.5 billion revolver maturing Sept. 2017. As of Sept. 30, 2012 all of which was available) and $2.4 billion of cash as of Sept. 30, 2012. The company's favorable maturity schedule also adds to its overall financial flexibility. As of Sept. 30, 2012, DTVH's next scheduled maturity is not until 2014 when $1.0 billion of senior unsecured notes will mature.
Any ratings concerns center on DTVH's ability to adapt to the evolving competitive landscape and weak economic and housing formation conditions. Ratings also factor the company's lack of revenue diversity and narrow product offering relative to its cable MSO and telephone company competition. In Fitch's view DTVH's ability to innovate its video service to, among other things, establish a path to become more IP-video enabled is critical for the company to control subscriber churn and subscriber retention spending, grow video ARPU and expand operating margins. The ratings also incorporate Fitch's belief that DTVH's satellite infrastructure can put the company at a competitive disadvantage relative to its competition's respective technology and network positions as video content is increasingly consumed over alternate platforms and devices.
What Could Trigger a Positive Rating Action:
--Assumption of a more conservative financial strategy, in the absence of any material erosion of the operating profile of DIRECTV's U.S. business segment, that would reduce leverage to 2.0x on sustainable basis.
--The growing importance of the DIRECTV's Latin American segment, in terms of revenue, EBITDA and FCF generation will lead to positive rating actions holding the operating profile of the company's US business constant.
What Could Trigger a Negative Rating Action:
--A change in the existing guaranty structure or a sale of DIRECTV's ownership stake in DTVLA.
--Adoption of a weaker leverage target or an event such as a debt-financed dividend or leveraging transaction that increases leverage higher than 3.5x in the absence of a creditable de-leveraging plan.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 8, 2012);
--'Rating Global Telecoms Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating Telecom Companies