Fitch Expects to Rate Cablevision's Proposed Senior Unsecured Notes 'B+(EXP)/RR3'

CHICAGO--()--Fitch Ratings has assigned Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) of 'B' and 'BB-', respectively, to Cablevision S.A. (Cablevision). The Rating Outlook is Stable. Fitch has simultaneously assigned an expected rating of 'B+(EXP)/RR3' to Cablevision's proposed senior unsecured bond issuance of up to USD500 million. The proceeds of the notes will be used to refinance the company's existing debt and for general corporate purposes.

Cablevision's Long-Tem Foreign-Currency IDR is constrained by the 'B' country ceiling of the Republic of Argentina. Country Ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency to any foreign currency under a stress scenario, and/or may not allow the transfer of foreign currency abroad to service foreign currency debt obligations. Since taking power in December 2015, the Mauricio Macri administration removed FX controls introduced in 2011 and increased the flexibility of the Argentine peso, which should contribute towards improving the capacity of the economy to absorb external shocks and relieve pressure on international reserves.

Fitch expects to assign an 'RR3' Recovery Rating to Cablevision's proposed issuance, which reflects good recovery prospects in the event of default given the company's solid balance sheet and cash flow generation. Fitch believes that the company's default, should it occur, would be most likely driven by transfer and convertibility restrictions imposed upon the payment of foreign debt, not a material deterioration of the company's business or financial profile.

KEY RATING DRIVERS

Cablevision's ratings reflect the company's strong business position as the leading Pay-TV and broadband provider in Argentina, its solid financial profile underpinned by its consistent and robust free cash flow generation and conservative capital structure. Negatively, the company's ratings are tempered by Argentina's mature Pay-TV market amid intense competition, and subdued macro-economic environment, including high inflation and steep currency devaluation.

Strong Business Position

Cablevision is the leading Pay-TV and broadband provider in Argentina with subscriber market shares of 39% and 29%, in each segment respectively. Cablevision's operation is mainly concentrated in the AMBA Region, which includes the City of Buenos Aires, where approximately 53% of its customers are located. Fitch expects the company's market leadership to remain intact over the medium term given its solid network quality and coverage, with one of the most technologically advanced network in main markets, and strong brand recognition. Negatively, the competitive landscape in Argentina could become more intense over the long term due to the regulatory changes, which will allow other telecom operators to enter the Pay-TV market potentially as early as 2018.

Solid Performance

Cablevision has a solid operational track record, with consistent revenues and EBITDA growth in recent years, supported by continued expansion of its subscriber base and average revenue per user (ARPU). While the company's cable subscriber number has remained relatively flat at around 3.5 million during the five year period from 2011 to 2015, its broadband subscriber base has grown by 51% to 2 million from just 1.3 million during the period. In addition, the company has exhibited its ability to consistently raise prices to mitigate pressures from high inflation and local currency devaluation. ARPU improved to ARS518 during the first quarter of 2016 compared to ARS199 in the first quarter of 2013, which resulted in a stable ARPU in US dollar terms of USD36 during the first quarter of 2016 compared to USD40 during the 1Q13. Based on this, Cablevision's revenues and EBITDA increased to USD1.7 billion and USD640 million, respectively, during the LTM ending March 31, 2016, which were 13% and 32% improvement from the levels in 2011.

Robust Financial Profile

Cablevision's financial profile is among the strongest compared to its regional Fitch-rated telecom peers across rating categories. The company has historically maintained a conservative capital structure to cope with any operational/ regulatory risks and Fitch forecasts its net leverage, measured by total adjusted net debt to EBITDAR, to remain low at around 0.5x in the short to medium term backed by its stable cash flow generation. During the last 12 months (LTM) ended March 31, 2016, the company's gross and net leverage were 0.9x and 0.3x, respectively. Although the company's capital intensity, measured as capex-to-sales, is expected to increase toward 30% in the short to medium term due to continued network upgrades, potentially including mobile network following the Nextel acquisition, this should be largely covered by its solid cash flow from operations resulting in stable leverage.

Improving Regulatory Environment

Regulatory stance of the new administration is favorable for Cablevision. The newly appointed regulatory body has eased regulatory pressures to promote market-driven competition, with measures including lifting restrictions on market share and licenses. Historically, the company was faced with high regulatory risk and aggressive political interference that was linked to the previous administration's efforts to dismantle Cablevision's parent, Grupo Clarin. Fitch believes that the moderate regulatory framework is unlikely to change given the already intense competitive landscape and high level of penetration in the cable industry. The delayed entry of other telecom operators into the Pay-TV market for another two years would also help mitigate the competitive pressures to an extent in the short to medium term.

Mature Pay-TV Market

Argentina has among the highest Pay-TV penetration in Latin America with 9.1 million subscribers representing a penetration rate of 79%. Its high penetration rate and increasing competition, especially over the long-term with new entrants, will offer limited growth headroom going forward. Although Cablevision is well positioned to cope with the increasing competition given its entrenched business position, high competitive pressures amid market maturity would negatively affect its operating margins in the long term. Fitch believes that Cablevision's growth will come mainly from its broadband segment as the company has room to penetrate into its Pay-TV customer base, with the penetration rate reaching just 35% of the home passed as of Dec. 31, 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Cablevision include:

--Double-digit annual revenue growth with stable EBITDA margins of 38% - 39% over the medium term;

--The company's Pay-TV & Broadband market shares to remain stable over the medium term;

--Increased capex intensity to 28% - 30% in the short to medium term;

--Bond issuance during 2016 to refinance most of the company's existing debt; and

--Net leverage to remain stable at around 0.5x over the medium term.

RATING SENSITIVITIES

Negative: Fitch does not foresee any negative rating pressures for Cablevision that would stem from operational difficulties in the short to medium term given its solid market position and strong financial profile.

Ratings would be downgraded in case of a downgrade of Argentina's sovereign rating, introduction of adverse regulatory or government measures that would materially affect the company's market share and credit profile.

Positive: An upgrade is unlikely as the ratings are constrained by the country ceiling.

LIQUIDITY

The company has a strong liquidity position, supported by its high balance of readily available cash, low leverage, and robust cash flow generation. As of the LTM ended March 31, 2016, the company held ARS4,611 million (USD315 million) of cash and marketable securities versus short-term debt of ARS4,086 million (USD279 million). During the same period, the company's free cash flow (FCF) generation remained solid at ARS22 million (USD 1.7 million) after covering capex of ARS5,190 million (USD400 million) and dividends of ARS436 million (USD34 million).

FULL LIST OF RATING ACTIONS

Fitch rates the following:

Cablevision S.A.

--Long-Term Foreign-Currency IDR 'B';

--Long-Term Local-Currency IDR 'BB-';

--Senior Unsecured proposed issuance 'B+(EXP)/RR3'

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005440

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005440

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368 3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Johnny DaSilva
Director
+1-212-368 1367
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3340
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368 3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Johnny DaSilva
Director
+1-212-368 1367
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3340
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com