Fitch Rates CCO Holdings' Sr. Unsecured Notes 'BB-'; Remains on Watch Positive

CHICAGO--()--Fitch Ratings has assigned a 'BB-' rating to the following CCO Holdings, LLC (CCOH) issuances:

--$1.15 billion 5.125% senior unsecured notes due 2023; and

--$750 million 5.375% senior unsecured notes due 2025.

The ratings for CCOH remain on Rating Watch Positive.

CCOH and Charter Communications Operating, LLC's (CCO) 'BB-' IDRs were placed on Rating Watch Positive following the April 2015 announcement of the acquisition of Bright House Networks, LLC (Bright House). CCOH and CCO are indirect wholly owned subsidiaries of Charter Communications, Inc. (Charter).

Proceeds from the offering are expected to be used for the repayment of CCOH's $1 billion of 7.25% senior notes due 2017 and $700 million of 8.125% senior notes due 2020. Approximately $14.1 billion of debt (principal value - excluding the debt issued by CCOH Safari, LLC and CCO Safari, LLC) was outstanding as of Dec. 31, 2014.

Fitch placed the ratings of CCOH and CCO on Positive Watch following Charter's announcement that it has entered into definitive agreements to acquire Bright House from Advance/Newhouse Partnership (A/N) for $10.4 billion. Fitch believes that the proposed transaction will de-lever Charter's balance sheet after considering both the current transaction and the previously announced transactions with Comcast Corporation.

Fitch estimates that Charter's leverage declines to approximately 4x on a pro forma basis as of the LTM period ended Dec. 31, 2014. Moreover the transaction strengthens Charter's overall competitive position by increasing scale and improving its subscriber clustering profile, enabling greater operating efficiencies and creating a stronger platform for growth.

The acquisition will be effected through a partnership of which Charter will control 73.7% ownership and A/N will retain 26.3% ownership. Total consideration to be paid to A/N by Charter includes $5.9 billion of common units, and $2.5 billion of convertible preferred units in the partnership, in addition to $2 billion of cash. Finally, Liberty Broadband Corporation has agreed to purchase $700 million of Charter common stock upon close of the transaction. The partnership units owned by A/N are exchangeable into Charter common stock. The transaction is subject to several conditions, including among others, Charter shareholder approval, the expiration of Time Warner Cable's right of first offer for Bright House, the close of Charter's previously announced transactions with Comcast, and regulatory approval.

KEY RATING DRIVERS

--Fitch believes the acquisition of Bright House will strengthen Charter's overall credit profile. Fitch anticipates that Charter's leverage, pro forma for the contemplated transactions will decline to approximately 4x;

--The proposed transaction will increase Charter's scale and improve operating efficiencies and subscriber clustering profile;

In total, Fitch views the acquisition of Bright House along with the previously announced transactions with Comcast positively. The combination creates the second largest cable MSO in the country (assuming Comcast's proposed merger with TWC closes) with 7.6 million video subscribers owned by Charter and 10.1 million video subscribers after considering the Greatland Connections assets managed by Charter. The transactions improve Charter's subscriber clustering, enabling greater operating efficiencies and creating a stronger platform for growth. The Bright House acquisition adds approximately two million video customers in markets largely contiguous with Charter's existing service footprint and adds attractive markets such as Orlando and Tampa Bay Florida. Fitch notes, however, that integration risks are elevated and Charter's ability to manage the integration process and limit disruption to the company's overall operations is key to the success of the transactions.

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 ARPU trends, and stabilizing operating margins.

Charter's leverage as of the LTM ended Dec. 31, 2014 was 4.4x excluding the debt issued by CCOH Safari, LLC and CCO Safari, LLC. Management's leverage target remains unchanged ranging between 4x and 4.5x. The pro forma leverage coupled with the improving operating profile is reflective of a 'BB' IDR. Fitch has previously indicated that positive rating actions would likely coincide with leverage expected to be sustained below 4.5x while demonstrating progress in closing gaps relative to its industry peers on service penetration rates and strategic bandwidth initiatives.

The company's liquidity position is primarily supported by available borrowing capacity from its $1.3 billion revolver and anticipated free cash flow generation. Commitments under the company's revolver will expire on April 22, 2018. As of Dec. 31, 2014, approximately $817 million was available for borrowing. Near-term scheduled maturities consist of $91 million scheduled to mature during 2015 followed by $127 million during 2016. Approximately $1.1 billion of debt is scheduled to mature during 2017.

Resolution of the Rating Watch will largely be based on Fitch's review of Charter's capital structure including assignment of potential equity credit to the convertible preferred partnership units and an assessment of the risks associated with Charter's ability to integrate cable systems acquired from Comcast and Bright House.

RATING SENSITIVITIES

--Positive rating actions would be contemplated as leverage is expected to remain below 4.5x;

--If the company demonstrates progress in closing gaps relative to its industry peers on 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.

--Fitch believes negative rating actions would likely coincide with 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.

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=982921

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Contacts

Fitch Ratings, Inc.
Primary Analyst
David Peterson
Senior Director
+1-312-368-3177
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Constance McKay
Associate Director
+1-312-368-3148
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
David Peterson
Senior Director
+1-312-368-3177
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Constance McKay
Associate Director
+1-312-368-3148
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com