CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to CSC Holdings LLC's (CSCH) $750 million issuance of 5.25% senior unsecured notes due 2024.
Fitch expects the proceeds from the issuance will be used to repay a portion of the company's existing credit facility. Outside of an extension of CSCH's maturity profile, the company's credit profile has not substantially changed. CSCH is a wholly owned subsidiary of Cablevision System Corporation (CVC) and each have a Fitch Issuer Default Rating of 'BB-'. CVC had approximately $9.8 billion of consolidated debt outstanding as of March 31, 2014.
KEY RATING DRIVERS
--CVC's credit and operating profile weakly positions the company within the current rating category;
--The Negative Outlook reflects a likely delay in expected improvement in CVC's credit profile;
--Fitch's expectation for near-term debt reduction supports the current ratings.
The Negative Outlook incorporates Fitch's belief that CVC's credit profile, while strengthening somewhat, remains weakly positioned within the current ratings. 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 could result 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 double-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 plans to 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 improve operational efficiencies. These actions have resulted in CVC's LTM EBITDA margin expanding 193 basis points to 28.3% during first quarter 2014 (1Q'14) relative to the same period last year. The company anticipates EBITDA growth in the mid-to-high single digits for the remainder of 2014. However, Fitch believes 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 including along key train routes and stations during 2014. Additionally, the company has upgraded its cable head-ends to facilitate the launch of its DVR Plus service - CVC's remote storage or cloud-based DVR service. Finally, the company is in the process of deploying its Optimum Programming Guide to its subscriber base. The increased level of investment, while prudent from a competitive standpoint, together with the company's lackluster operating profile will diminish FCF generation relative to Fitch's prior expectations.
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 1Q'14 with consolidated leverage of 5.5x, which is an improvement from 5.8x as of year-end 2013 and as of March 31, 2013. 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 5.6x and 5.4x at year-end 2014.
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 $768 million as of March 31, 2014 and available borrowing capacity from CSCH's $1.5 billion revolver expiring April 2018. In the short term, CVC's financial flexibility is constrained somewhat by management's decision to increase capital spending to improve operations and position the company for long-term success. The increased capital spending along with higher programming expenses will hamper CVC's ability to continue generating FCF at a level commensurate with historical levels. Fitch expects higher FCF generation during 2014 through EBITDA growth and stabilizing capital intensity.
CVC extended its maturity profile and reduced the volume of maturities between 2014 and 2017 after refinancing its credit facility in April 2013. Scheduled maturities (excluding collateralized monetization transactions) consist of $42 million during the remainder of 2014, $71 million during 2015 and $575 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 1Q'14 (versus $188.6 million in 2012). As of March 31, 2014, CVC had $455.3 million of availability remaining under its stock repurchase program.
Key considerations that can lead to a stabilization of the current ratings include but are not limited to:
--Further strengthening of the company's credit profile and a sustained reduction of leverage to below 5.5x;
--Clear indications that pricing and cost reduction initiatives are producing desired revenue growth acceleration and EBITDA margin expansion;
--Positive FCF generation;
--Cablevision demonstrating that its operating profile will not materially decline in the face of competition and the soft economic recovery.
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-to-high 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;
--The re-initiation of aggressive share repurchases while leverage remains elevated.
Fitch has the following ratings with a Negative Outlook:
Cablevision Systems Corporation
--Senior Unsecured Debt 'B-'
CSC Holdings LLC
--IDR at 'BB-'
--Senior Secured Credit Facility 'BB+'
--Senior Unsecured Debt 'BB'
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. 8, 2012);
--'Rating Telecom Companies' (Aug. 9, 2012)
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Telecom Companies