Fitch Places DISH's 'BB-' IDR on Rating Watch Negative

CHICAGO--()--Fitch Ratings has placed the 'BB-' Issuer Default Rating (IDR) assigned to DISH Network Corporation (DISH) and its wholly owned subsidiary, DISH DBS Corporation (DDBS), on Rating Watch Negative. Fitch also has placed DDBS' senior unsecured issue ratings on Rating Watch Negative. DISH had approximately $13.8 billion of debt outstanding at June 30, 2015.

The Negative Watch reflects the uncertainty surrounding DISH's funding strategy and potential negative effect on DISH's credit profile arising from the announcement that the FCC voted to deny $3.3 billion in bidding credits previously awarded to DISH's bidding entities in the Advanced Wireless Services 3 (AWS-3) auction. DISH's cash and marketable securities (current portion) totalled approximately $1.1 billion at June 30, 2015, which provides limited flexibility to fund the payment and maintain the company's stated $1 billion minimum cash requirement.

Fitch will resolve the Rating Watch when there is clarity around several factors, including the articulation of DISH's funding strategy, the timing of the payout, and the potential for any subsequent litigation by the designated entities. Fitch believes a negative rating action will likely coincide with the company's decision to fund the payment with incremental debt and increase consolidated leverage higher than 5x without a clear strategy to de-lever its balance sheet within a 12 month to 18 month rating horizon. Potential negative rating action is expected to be limited to one notch. Additional scenarios that may have a potential rating impact will be evaluated as they are disclosed.

KEY RATING DRIVERS

Wireless Strategy Poses Event Risk: The current ratings encompass the lack of visibility into DISH's wireless strategy, and the potential capital requirements and execution risk associated with that strategy. Fitch acknowledges the significant asset value and strategic optionality associated with DISH's investment in wireless spectrum. However, in Fitch's view, DISH would need to meaningfully differentiate its wireless services in order for the strategy to successfully diversify its revenues, and to provide for potential cash flow growth. An offering similar to other wireless operators' services would likely struggle to gain traction, given the maturing wireless market and entrenched national operators. Fitch notes that the terms of its wireless spectrum assets require the company to build out a portion of the spectrum coverage area, which can pressure the company's credit profile.

DISH's efforts to transform though various wireless initiatives remain in a development stage. The company's strategy has experienced numerous set-backs as the company endeavors to engage another wireless carrier seeking a partnership, acquisition or network-sharing agreement. Event risks remain elevated as the company contemplates additional acquisitions of spectrum or assets to support the wireless strategy. The strategic importance of a wireless broadband service option has not diminished and, as such, Fitch expects DISH will likely continue its efforts to engage an existing national wireless service provider.

Total debt outstanding was approximately $13.8 billion as of June 30, 2015. DISH's leverage totaled 4.6x for the latest 12 month (LTM) period ended June 30, 2015, a decrease from 4.9x and 4.8x at year-end 2014 and 2013, respectively. The cash proceeds from the company's incremental debt issuances have largely remained on its balance sheet, and supported DISH's wireless spectrum purchase in first-quarter 2015.

Ratings Reflect Weak Trends: Fitch believes the company's overall credit profile has limited capacity to accommodate DISH's inconsistent operating performance as the company struggles to transform its branding strategy from a value-oriented service provider to a technology-focused provider targeting high-value subscribers. While subscriber metrics remain weak, average revenue per user (ARPU) has benefited from programming cost increases, higher hardware-related revenue and increased advertising revenue. ARPU increased 4.3% for the first six months of 2015 versus the prior period.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for DISH include nominal overall revenue growth generated by slower subscriber and ARPU growth. EBITDA margins in 2015 and 2016 are expected to decline slightly from the 20.1% recorded in 2014, assuming that higher programming costs are offset somewhat by SG&A cost containment efforts.

RATING SENSITIVITIES

Fitch believes the Rating Watch will be resolved when the company articulates a plan related to the $3.3 billion bidding credit payment.

Fitch believes a negative rating action will likely coincide with the company's decision to fund the payment with incremental debt and thus increasing consolidated leverage higher than 5x without a clear strategy to de-lever its balance sheet to below 5.0x within a 12 month to 18 month horizon. Potential negative rating action is expected to be limited to one notch.

LIQUIDITY

The company's current liquidity position is adequate for its ongoing operations. Overall, the company's liquidity position and financial flexibility is supported by expected free cash flow (FCF) generation. The company also benefits from a reasonable maturity schedule, as 37% of the company's outstanding debt is scheduled to mature through 2019 but no more than approximately 10% in any one year. In 2016, $1.5 billion matures.

DISH had a total of approximately $1.1 billion of cash and marketable securities (current portion) as of June 30, 2015. The majority of DISH's consolidated cash and marketable securities balances were held at DISH. The company's stated minimum cash requirement of $1 billion and FCF generation mitigate the risk caused by the lack of a revolving credit facility.

DISH's FCF (defined as cash flow from continuing operations less capital expenditures and dividends) generation rose approximately 73% as of the LTM period ended June 30, 2015 to $1.6 billion when compared to the same period during 2014. DISH's capital intensity remained relatively stable in the 8% to 9% range in 2014. Capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Negative:

DISH Network Corporation

--IDR at 'BB-'.

DISH DBS Corporation

--IDR at 'BB-';

--Senior unsecured notes at 'BB-/RR4'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 12 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867275

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989635

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Constance McKay, +1-312-368-3148
Associate 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, +1-312-368-3156
Managing Director
or
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Constance McKay, +1-312-368-3148
Associate 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, +1-312-368-3156
Managing Director
or
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com