Fitch Rates DIRECTV Holdings LLC's Sr. Unsecured Notes 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to DIRECTV Holding LLC's (DTVH) issuance of 4.45% senior unsecured notes due 2024. DTVH is a wholly owned indirect subsidiary of DIRECTV. Proceeds from the offering are expected to be used for general corporate purposes including the repayment of DTVH's 4.75% senior notes due October 2014, 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 Dec. 31, 2013, DTVH had approximately $19.5 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.

KEY RATING DRIVERS

--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.

--The ratings incorporate Fitch's expectation for continued generation of free cash flow (FCF; before dividends to DIRECTV) and the company's high level of financial flexibility within the existing ratings category.

--The growth prospects of DIRECTV's Latin American (DTVLA) business segment.

--The ratings also factor the company's lack of revenue diversity and video centric service offering relative to its cable MSO and telephone company competition, which limits growth prospects in the U.S.

Consolidated credit protection metrics are aligned with Fitch's expectations and strongly positioned within the current rating category. Consolidated leverage stood at increased to 2.37x as of the latest 12 month (LTM) period ended Dec. 31, 2013, while leverage increases temporarily to 2.52x forma for the current issuance and pending maturity of the senior notes due in Oct. 2014.

DIRECTV's financial strategy remains consistent and focused on returning capital to its shareholders in the form of share repurchases while managing its balance sheet to its 2.5x leverage target. DIRECTV repurchased approximately 70 million of its shares for $4 billion during 2013. Approximately $862 million of capacity remains on the current share repurchase authorization as of Dec. 31, 2013. During Feb. 2014 DTV's board of directors approved a new $3.5 billion share repurchase authorization. The company expects to repurchase $3.5 billion of its stock during 2014.

The ratings incorporate Fitch's expectation for continued generation of free cash flow (at DTVH and before dividends to DIRECTV) and the company's high level of financial flexibility within the existing ratings category. 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 a consolidated basis, the company generated over $2.6 billion of FCF during the year-ended Dec. 31, 2013 including a $5 million FCF deficit reported within the company's Latin American segment. Fitch believes the U.S. business segment will continue generating a significant majority of consolidated FCF and anticipates modest FCF growth over the ratings horizon. FCF generation will be supported by mid-single digit revenue growth along with stable EBITDA margins and consistent capital spending in the range of $1.75 billion annually within its U.S. business segment.

Overall, the ratings incorporate 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 approximately 20.3 million video subscribers as of Dec. 31, 2013. 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.

DIRECTV's Latin America business (DTVLA) represents the company's most significant growth opportunity and implicitly supports the current ratings though the DIRECTV parent guaranty of DTVH's outstanding indebtedness. DTVLA generated approximately $6.8 billion of revenue and $1.9 billion of EBITDA during the year-ended Dec. 31, 2013. Subscriber growth and currency fluctuation within the segment has limited segment FCF generation (defined as cash flow from operations less capital expenditures), which amounted to approximately negative $5 million during year-ended Dec. 31, 2013. Fitch expects economic headwinds, growing competition, and currency fluctuations will diminish DTVLA's revenue and cash flow growth rates. Fitch believes incremental pay-TV penetration gains will largely come from the emerging middle markets as relatively high penetration rates among high-end households within the region limit the growth potential of this segment. DTVLA's focus within the region is capturing market share further down the economic spectrum in the middle markets while balancing subscriber churn and profitability position DTVLA to generate meaningful EBITDA and free cash flow growth over the ratings horizon. DTVLA operates a direct broadcast satellite business throughout Latin America and the Caribbean under the DIRECTV and SKY brands.

The ratings also consider the DTVH's lack of revenue diversity and narrow product offering relative to its cable MSO and telephone company competition. Fitch believes DIRECTV is weakly positioned to address evolving video and media consumption patterns and the emergence of alternative video distribution platforms. Fitch believes the provision of video services will become increasingly internet protocol (IP) based. DIRECTV'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 maintain its competitive position, grow video average revenue per unit and expand operating margins. Fitch views the DBS platform - in particular its lack of a facilities-based, wireline, and wireless broadband capability - as a potential competitive disadvantage relative to the cable MSO and telephone company's respective technology and network positions.

Video services within the United States are a mature product with, in Fitch's opinion, limited revenue and subscriber growth potential, which eventually will pressure subscriber churn and operating margins. Notwithstanding its narrow product offering, DTVH has a strong competitive position. Balancing subscriber growth and maximizing profitability and cash flow generation remains among the core of DIRECTV's strategic priorities within its U.S. business segment and appropriate in Fitch's view given the current operating environment.

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.

In addition to FCF generation, the company's liquidity position is supported by the collective available borrowing capacity under its $2.5 billion revolver (consisting of a $1 billion revolving credit facility maturing February 2016 and a $1.5 billion revolver maturing September 2017. All of which was available for borrowing as of Sept. 30, 2013). These facilities support DTVH's $2.5 billion commercial paper program, of which there was $200 million outstanding as of Dec. 31, 2013. Consolidated cash balance totaled approximately $2.2 billion as of Dec. 31, 2013. The company's maturity schedule is well laddered and also adds to its overall financial flexibility. DTVH has $1 billion of debt scheduled to mature during 2014 followed by 1.2 billion in 2015 and $2.25 billion in 2016.

DIRECTV's down-stream guaranty of DTVH's senior unsecured notes has a neutral effect on DTVH's credit profile, in Fitch's opinion. DTVH bondholders will benefit from the cash flows generated from DIRECTV's businesses owned outside of DTVH, including DIRECTV Latin America Holdings, Inc. and DIRECTV Sports Networks, LLC. Fitch believes that DTVH will continue to be the primary issuer of unsecured debt. Future note issuances are expected to be guaranteed by DIRECTV and treated on a pari passu basis with DTVH's existing unsecured notes. DIRECTV is not restricted from issuing debt from either DIRECTV or DTVLA. Debt issued at either entity will diminish DIRECTV's guaranty and be treated as an event risk by Fitch.

RATING SENSITIVITIES

Positive:

--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.

--Generation of material and sustainable level of FCF from DIRECTV's Latin American segment will likely lead to positive rating actions holding the operating profile of the company's US business constant.

Negative:

--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 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. 5, 2013);

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 8, 2012);

--'Rating Telecoms Companies' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824511

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Contacts

Fitch Ratings
Primary Analyst
David Peterson, +1-312-368-3177
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Culver, CFA, +1-312-368-3216
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-606-2302
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
David Peterson, +1-312-368-3177
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Culver, CFA, +1-312-368-3216
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-606-2302
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com