CHICAGO--(BUSINESS WIRE)--Fitch Ratings has placed the 'BB-' Issuer Default Rating (IDR) for Cablevision Systems Corporation (CVC) and its wholly owned subsidiary CSC Holdings, LLC (CSCH) on Rating Watch Negative. In addition, Fitch has assigned recovery ratings and placed the specific issue ratings assigned to CVC and CSCH on Rating Watch Negative. A full list of ratings follows the end of this release.
The Negative Watch arises from the September 17, 2015 announcement by Altice N.V. (Altice) that it would acquire CVC for $34.90 per share or an enterprise value of $17.7 billion, including $8.4 billion of existing debt. The transaction is expected to close in the first half of 2016 after all necessary regulatory approvals are obtained. Cablevision shareholders have approved the transaction, and the transaction is not subject to further shareholder approval.
CVC will become an unrestricted subsidiary of Altice and will maintain a separate capital structure. Financing plans have been committed and will consist of $6 billion of incremental debt to be issued at either CVC, or CSCH or a combination of both, and $3.3 billion of equity. Approximately 70% of the equity financing will be committed by Altice. The remaining 30% will be syndicated to co-investors and is backstopped by Altice. Altice also has commitments to refinance $2.1 billion of outstanding term loans at CSCH and $480 million of outstanding term loans at Newsday, LLC, a CSCH subsidiary.
This transaction will represent Altice's second acquisition of a U.S. cable operator this year. On May 20, 2015, Altice announced its entry into the U.S. market with the acquisition of Suddenlink Communications (Suddenlink), the seventh largest U.S. cable operator with approximately 1.5 million subscribers in more than a dozen states, for $9.1 billion. The purchase will be funded with $6.7 billion of new and existing Suddenlink debt, a $500 million vendor loan note from BC Partners and CPP Investment Board, and $1.2 billion of cash. The transaction is valued at 7.6x pro forma EBITDA (assumes $215 million of synergies) and is expected to close in the fourth quarter of 2015.
Fitch anticipates resolving the Negative Watch around the time of the closing of the transaction. In reviewing the transaction, Fitch will focus on the financing of the transaction, the issuing entities of the incremental debt, and the viability of the potential synergies and their expected timing, among other factors.
KEY RATING DRIVERS
--The acquisition of CVC and Suddenlink by Altice will create the fourth largest MVPD operator in the U.S.
--Although Altice has demonstrated its ability to achieve synergy targets at previous acquisitions, in Fitch's opinion, there is significant execution risk given that: 1) Altice is a new entrant to the U.S. market, 2) Altice has presented sizable synergies that may be difficult to realize entirely, and 3) it will not have contiguous operations that would benefit from scale efficiencies.
--Excluding synergies, pro forma leverage for the transaction will increase to 8.5x from 5.2x at the end of second-quarter 2015.
Improving Credit Profile: Fitch believes that Cablevision Systems Corporation's (CVC) credit profile, while weakly positioned within the current rating, will continue to strengthen in step with anticipated improvement of its operating profile. 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.
Modest EBITDA Improvement: In addition to ongoing pricing initiatives previously implemented, CVC's continuing operating cost initiatives partially offset high single-digit programming cost inflation by driving down other costs. These actions resulted in EBITDA margin expansion of 136 bps to 28.4% in 2014 from the previous year. However, Fitch does not believe that the operating margin of CVC's core cable segment will return to historical levels and CVC's EBITDA margins continue to lag those of its peer group.
Leverage Reduction: 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 second-quarter 2015 with leverage of 5.2x, which is an improvement from 5.3x and 5.8x at year-end 2014 and 2013, respectively. Fitch expects initiatives to improve operational efficiency and ongoing pricing actions will expand EBITDA margins modestly during 2015. The operating initiatives and debt reduction should strengthen credit protection metrics.
Fitch's key assumptions within the rating case include:
--A $10 billion equity valuation that funded with $3.3 billion of equity from Altice and its co-investors, $6 billion of incremental debt, and cash on hand;
--CVC revenue growth in the low-single digits, reflecting the maturity and high penetration rate of the company's services.
The rating could be affirmed at the current level if, in Fitch's view, CVC will be able to reduce leverage below 5.5x within a 18-24 month period and remain at that level on a sustainable basis. Specifically, Fitch would want to see strengthening EBITDA margins and strong progress on Altice's ability to realize expected synergies.
Negative ratings actions would likely coincide with:
--If the company does not present a credible deleveraging bring leverage below 5.5x times within 18-24 months.
--EBITDA margins remain weak compared to peer group or as a result of inability to realize synergies.
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 $797 million as of June 30, 2015 and available borrowing capacity from CSCH's $1.5 billion revolver expiring April 2018. Fitch expects CVC's financial flexibility will strengthen in line with its improving operating profile and FCF generation.
CVC reduced its annual term loan amortization payments after issuing $750 million of senior notes due 2024 to prepay a portion of its term loan B in May 2014. CSCH repaid an additional $200 million under its term loan B in April 2015. Scheduled maturities at June 30, 2015 (excluding collateralized monetization transactions) consist of $30 million during the remainder of 2015, $564 million during 2016 and $1 billion in 2017.
The following ratings have been placed on Rating Watch Negative:
Cablevision Systems Corporation
--Senior unsecured notes 'B+'.
CSC Holdings, LLC
--Senior secured credit facility 'BB+;
--Senior unsecured notes 'BB'.
Fitch has also assigned the following recovery ratings:
Cablevision Systems Corporation
--Senior unsecured debt 'RR5'.
CSC Holdings, LLC
--Senior secured credit facility 'RR1';
--Senior unsecured debt 'RR2'.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)