NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Cox Enterprise Inc.'s (CEI) proposed $1.85 billion senior unsecured term loan facility due Dec. 31, 2017. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
Proceeds from the term loan are to be used to fund a portion of the approximately $4.6 billion acquisition of Dealertrack Technologies (Dealertrack) announced on June 15, 2015. The balance of the acquisition will be funded through an existing bank facility and a new $750 million common equity investment from BDT Capital Partners. The deal is expected to close during the third quarter of 2015 subject to the receipt of certain regulatory approvals. As of March 31, 2015, CEI had $11.1 billion of total debt.
KEY RATING DRIVERS
--The ratings continue to be anchored by Cox Communications Inc.'s (CCI) cable business.
--There is currently no flexibility within the current ratings to accommodate an increase in 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 focus on reducing leverage over the next 12 - 24 months and return to levels more in line with its current rating. The Dealertrack acquisition is an affirmation of the company's growth strategy, which has recently focused more on CEI's Cox Automotive Group Inc. (Cox Auto) group.
CEI's leverage, based on Fitch's standard leverage calculation, was 2.7x as of the LTM period ended March 31, 2015. This is modestly higher when compared with 2.6x as of year-end 2014 but in line with 2.7x as of the LTM period ended March 31, 2014.
Fitch acknowledges that 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 the 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 video 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. Cox Auto is poised to capitalize on Dealertrack and previous investments, which broadens its 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 March 31, 2015, CEI generated approximately $2 billion of FCF. 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 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 $149 million during the LTM ended March 31, 2015.
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 $626 million during the remainder of 2015, $630 million during 2016 and $45 million during 2017.
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.
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 an action could occur if CEI does not reduce total leverage below 3.0x over a 12 - 24-month timeframe.
LIQUIDITY AND DEBT STRUCTURE
CEI's liquidity position was supported by $399 million of cash on hand as of March 31, 2015, 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 March 31, 2015. CEI's revolver serves as the liquidity back-stop for its commercial paper program ($0 outstanding as of March 31, 2015). Either CEI or CCI may borrow up to $3.5 billion, provided that the aggregate amount outstanding under the facility does not exceed $3.5 billion. CEI and CCI are each severally, but not jointly, liable for their respective borrowing.
Fitch currently provides the following ratings:
Cox Enterprises, Inc.
--Senior unsecured debt 'BBB+';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Cox Communications, Inc.
--Senior unsecured debt 'BBB+';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
Date of Relevant Committee: June 15, 2015.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 05 Aug 2013)
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