Fitch Affirms Cox Enterprises and Cox Communications IDR at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB+' long-term IDR for Cox Enterprises, Inc. (CEI) and its wholly-owned subsidiary Cox Communications, Inc. (CCI). In addition, Fitch has affirmed the individual issue ratings of CEI and its subsidiaries (as outlined below). The Rating Outlook is Stable. As of June 30, 2014, CEI had approximately $13 billion of debt outstanding including approximately $9.2 billion outstanding at CCI.

KEY RATING DRIVERS:

--The ratings continue to be anchored by CCI's cable business.

--There is a limited level of flexibility within the current ratings to accommodate a shift in the company's capital allocation strategy to favor investments outside of the core cable business and shareholder-friendly activities.

--Fitch expects CEI's capital allocation policy will remain consistent with the current ratings.

--Fitch links the IDRs of CCI and CEI in accordance with its 'Parent and Subsidiary Rating Linkage' criteria.

The ratings incorporate Fitch's expectation that CEI will maintain its leverage at or near the current level and commitment to a capital structure reflective of strong investment grade ratings. As evidenced by the AutoTrader Group transaction, acquisitions will remain a part of CEI's growth strategy as it seeks to grow and diversify its businesses. The ratings also reflect Fitch's opinion that any transactions that increase leverage beyond 2.5x will be followed by a period of focused deleveraging to bring leverage back in line with expectations for the current ratings.

CEI's consolidated leverage was 2.3x as of June 30, 2014 versus 2.2x as of Dec. 31, 2013 and 2.2x on June 30, 2013, calculated in accordance with CEI's credit facility (excluding Manheim securitized debt). CEI's leverage, based on Fitch's standard leverage calculation, was 2.7x as of the LTM period ended June 30, 2014. This is modestly higher when compared with 2.6x as of year-end 2013 and as of the LTM period ended June 30, 2013. Fitch expects consolidated leverage as of year-end 2014 will remain consistent with year-end 2013 metrics and improve modestly to 2.4x by year-end 2015.

Fitch expects CEI's capital allocation policy will remain consistent with the current ratings. CEI's capital allocation strategy places high priority on investment in its core businesses (CCI, AutoTrader, and Manheim). Fitch acknowledges the absence of a formal dividend policy creates uncertainty and elevates event risk. Fitch also notes a limited level of flexibility within the current ratings to accommodate a shift in CEI's capital allocation policy to favor investments outside its core businesses and shareholder-friendly activities. Future dividend payments will likely be made within the context of CEI's leverage target, current ratings, anticipated free cash flow (FCF) generation, and the scale and scope of internal or external investment opportunities.

Fitch's ratings reflect the size and strong competitive position of CCI, the company's largest business segment and the third-largest cable multiple system operator (MSO) in the U.S. The operating leverage inherent in cable business along with stable capital intensity enable CCI to generate consistent levels of FCF before dividends to CEI, thus providing CEI with significant financial flexibility. CCI's operating profile derives its strength from its formidable subscriber clustering profile in the company's seven primary markets located in 18 states, and improving revenue mix resulting from the ongoing success of its high-margin commercial business and high-speed data business.

Within the cable business, ratings concerns are centered on CCI's ability to adapt to changing competitive dynamics and maintain its relative market position given the challenging competitive environment. In addition, the mature vide service product, along with the tepid economic and housing recovery and to a lesser extent competition from alternative distribution platforms, will likely hinder CCI's ability to grow its subscriber base.

Similar to its cable MSO peer group, CCI's operating profile continues to be challenged by increasing programming costs. The cost increases will likely be a permanent consideration within CCI's cost structure. This can be attributable in part to higher costs related to sports programming, retransmission consent fees and contractual or renewal rate increases. Fitch believes CCI will be challenged to offset anticipated programming cost increases with price increases, which when coupled with video subscriber losses may limit the company's ability to expand CCI's operating margins.

The emergence of alternative methods for the distribution, storage and consumption of video content, attributable in large part to technology advances, has driven changes in consumer behavior that present both risks and opportunities to CCI and CEI. Consumers of media continually seek more control over when, how and where content is consumed. This over time will lead to changes to the existing business model. While potentially disruptive, Fitch does not expect changing consumer behavior to upend traditional distribution or consumption over the near term.

The ratings recognize the diversification and market leading positions of CEI's businesses, while acknowledging that some of these businesses remain exposed to moderate cyclical and secular pressures. ATG and Manheim are poised to capitalize on previous investments which broaden their respective service portfolios to accelerate revenue growth and expand operating margins.

Fitch expects organic growth at Cox Media Group to remain challenged as stability in television and increasing retransmission revenue is offset by pressures on newspapers, Valpak, and, to a lesser extent radio. CCI's ongoing efforts to streamline and consolidate the business, and its recent efforts to focus on larger markets, could drive moderate margin improvement going forward. Organic revenue growth at AutoTrader.com is driven by the continued migration of buyers to the internet while Manheim benefits from a stable used car market.

Overall, CEI's financial flexibility and liquidity position are solid considering its ability to generate consistent levels of FCF. Fitch expects that CCI will generate the majority of CEI's consolidated revenues and cash flow. However, Fitch notes that each of CEI's segments is positioned to generate positive FCF over Fitch's ratings horizon. During the LTM ended June 30, 2014, CEI generated approximately $1.2 billion of FCF, however FCF generation during the first half of 2014 was hampered somewhat by increased long-term incentive compensation payments and higher working capital requirements. Going forward Fitch expects that modest revenue growth and margin expansion will position the company to generate FCF in excess of $1 billion annually.

CEI's liquidity position was supported by $292 million of cash on hand as of June 30, 2014, anticipated FCF generation, and the borrowing capacity under the company's $3.5 billion revolver maturing March 28, 2019, all of which was available as of June 30, 2014. CEI's revolver serves as the liquidity back-stop for its commercial paper program ($1.8 billion outstanding as of June 30, 2014). Either CEI or CCI may borrow up to $3.5 billion, provided that the aggregate amount outstanding under the facility cannot exceed $3.5 billion. CEI and CCI are each severally, but not jointly, liable for their respective borrowing.

CEI has the ability to access the cash flows from all of its subsidiaries (restricted or unrestricted). CEI's credit agreement does not limit dividends from its unrestricted subsidiaries (primarily Cox Communications) as long as leverage (calculated in accordance with covenants) is below 5.0x. Financial flexibility is further enhanced by CCI's stable and recurring FCF, which totaled approximately $1.4 billion during the LTM ended June 30, 2014.

CEI's maturity schedule is manageable. As such, Fitch believes that CEI has sufficient financial flexibility through expected FCF generation, available borrowing capacity from the revolver, and capital market access to address near-term maturities. CEI's maturity schedule includes approximately $400 million during the remainder of 2014, and $600 million during each 2015 and 2016 largely reflecting scheduled maturities at CCI.

Fitch links the IDRs of CCI and CEI in accordance with its criteria. While no cross defaults or cross guarantees exist between the entities, Fitch believes that CCI's probability of default would be understated (i.e. rated higher) if it did not consider CEI's businesses and weaker credit profile. At the same time, it would overstate CEI's probability of default if the rating only incorporated the CEI businesses on a standalone basis and did not consider potential upstream cash flows CEI could access in distress.

RATING SENSITIVITIES:

Positive: Fitch does not anticipate further ratings upside. An upgrade would only come with a commitment to, and a credible rationale for, a substantially tighter leverage target, which is not expected.

Negative: Such rating actions could occur in tandem with a change in CEI's capital structure policy or an event such as a debt-financed dividend or leveraging acquisition that would drive leverage towards 3.0x (as calculated by CEI) for a sustained period of time, with no credible plan to delever back to 2.5x over a 12-24-month timeframe.

Fitch has affirmed the following ratings with a Stable Outlook:

Cox Enterprises, Inc.

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Cox Communications, Inc.

-- Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891654

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Contacts

Fitch Ratings
Primary Analyst
David Peterson, +1 312-368-3177
Senior Director
Fitch Ratings, Inc., 70 W. Madison, Chicago, IL 60602
or
Brian Yoo, +1 212-908-9175
Associate Director
or
Committee Chairperson
Stephen Brown, +1 312-368-3139
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
David Peterson, +1 312-368-3177
Senior Director
Fitch Ratings, Inc., 70 W. Madison, Chicago, IL 60602
or
Brian Yoo, +1 212-908-9175
Associate Director
or
Committee Chairperson
Stephen Brown, +1 312-368-3139
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com