CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a Long-Term Foreign Currency Issuer Default Ratings (IDRs) of 'B+ to Liberty Cablevision of Puerto Rico LLC (LCPR). The Rating Outlook is Stable.
A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
LCPR's ratings reflect the company's strong business position as the leading pay-TV and broadband services provider in Puerto Rico. The company has extensive network coverage and quality, and strong brand recognition. The ratings also incorporate the company's improved scale and cash flow generation following the acquisition of Choice in 2015, and adequate liquidity. The ratings are tempered by LCPR's high leverage and its lack of service and geographical diversification, making it vulnerable to the weak macroeconomic conditions in Puerto Rico.
LCPR is 60% owned by Liberty Global plc (LG) and 40% owned by Searchlight Capital Partners, and is a part of the LiLAC Group (LiLAC), which represents LG's Latin America and Caribbean operations. The company benefits from the strategic oversight by LG and its management expertise, as well as procurement and operating synergies from belonging to a larger operational group. LiLAC operating entities are separately capitalized and managed independently and LG maintains a group leverage target of 4.0x to 5.0x for its subsidiaries. LCPR's leverage level is currently aligned with that target. Fitch forecasts the company to maintain relatively stable leverage based on its operational fundamentals over the medium term, while any potential material improvement in the financial profile could be difficult as any significant deviation from the group's financial target could be limited.
LCPR's credit facility and its first-lien term loan are rated same as the company's IDR, given their 'RR4' recovery ratings which represent average recovery prospects in case of default. Based on Fitch's recovery analysis of the company's second lien term loan, Fitch assigned a 'RR6' recovery rating and the issuance rating of 'B-', indicating below average recovery prospects in the event of default, which is two notches lower than the company's IDR.
Strong Business Position
Fitch expects LCPR's market leadership to remain intact supported by its extensive network coverage and quality. LCPR is the leading pay-TV and broadband services provider in Puerto Rico with market shares of 39% and 53%, respectively. Competitive pressures are high in the broadband and pay-TV segments, and the fixed-voice service continues to suffer from the unfavourable industry trend of mobile-fixed substitution. This trend should continue to limit any material growth in ARPU and operating margins in the short-to-medium term. Positively, Fitch believes that LCPR's competitive advantages should enable the company to maintain its leading market shares.
Weak Operating Environment
Economic conditions in Puerto Rico continue to be negative for LCPR. The company's lack of geographic diversification exposes it to Puerto Rico's struggling economy, which is undergoing declining population, low GDP per capita, and high unemployment rates. Despite the company's stable performance in recent years, these factors could begin to erode service affordability and negatively affect LCPR's cash flow generation going forward. Fitch forecasts LCPR's revenue growth to be in the low single digits in the short-to- medium term, reflecting the weak macro environment and a high level of market competition.
Financial Profile Improvement
LCPR's cash flow from operations (CFFO) has grown consistently in recent years due to continued expansion of its subscriber base and the acquisition of Choice. During the LTM ended Sept. 30, 2016, the company generated CFFO of USD141 million, which favourably compares to the 2015 level of USD113 million and USD80 million in 2014. LCPR's improving operational cash flow generation has provided the company with comfortable headroom to cover its capex, averaging approximately USD65 million annually during 2014 and 2015, and positive FCF generation over the last two years. Fitch forecasts this trend to continue over the medium term, with its positive FCF margin in the low-to-mid single digits.
Fitch forecasts LCPR's net leverage, measured by total adjusted net debt to operating EBITDAR, to improve to 4.5x by end-2016, from 5.3x at end-2015, reflecting the full year EBITDA contribution from Choice and Fitch's aforementioned cash flow expectations. The company's deleveraging capacity should allow its leverage ratio to gradually improve further to 4.2x by 2018, barring any sizable shareholder distributions, the level that is solidly in line with the current rating level.
LCPR's credit weaknesses to its regional peers in the 'BB' rating category are its relatively small scale of operations, lack of diversified service offerings, and high leverage. In addition, the company's operating environment in Puerto Rico, which has undergone tough economic challenges is also a key credit concern. These weaknesses are somewhat mitigated by the LCPR's leading market position and network competitiveness, which are considered strong for its rating level. Parent/Subsidiary Linkage is not applicable and the ratings are not constrained by the country ceiling.
Fitch's key assumptions within the agency's rating case for the issuer include:
--Low-single digits revenue growth from 2017 and beyond, following an over 10% growth rate in 2016;
--Relatively muted EBITDA improvement from 2017 amid slow revenue growth and intense competition;
--Capital expenditures to remain at about 21% of revenues in the short-to-medium term;
--No material shareholder distributions;
--Total adjusted net leverage to remain in the range of 4.0x to 4.5x over the short-to-medium term.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Deterioration in operating performance caused by unfavorable macroeconomic conditions and competitive landscape;
--Sustained negative FCF generation amid higher-than-expected capex requirement;
--Any material cash flow upstream to LG;
--Adjusted net leverage increasing to above 5.0x on a sustained basis.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Continued solid top-line growth along with margin expansion, and positive FCF generation;
--Clear commitment for deleveraging in the absence of any material cash flow upstream to LG, resulting in its adjusted net leverage falling well below 4.0x on a sustained basis;
LCPR's liquidity is sound given its cash balance of USD51.0 million comfortably covers the short-term debt of USD0.2 million as of Sept. 30, 2016. Fitch does not foresee any liquidity problem for LCPR in the short-to-medium term as the company does not face any sizable debt maturities until 2022, when its first lien term loan B becomes due. The company's liquidity position is further strengthened by its USD40 million undrawn credit facility.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings.
Liberty Cablevision of Puerto Rico, LLC.
--Long-Term Foreign Currency Issuer-Default Rating (IDR) 'B+'; Outlook Stable;
--Senior Secured Revolver 'B+/RR4';
--Senior Secured 1st Lien Term Loan B due 2022 'B+/RR4';
--Senior Secured 2nd Lien Term Loan C due 2023 'B-/RR6'.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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