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Fitch Affirms Cox Enterprises and Cox Communications IDR at 'BBB'; Outlook Revised to PositiveAug 03, 2011 (Close-Up Media via COMTEX) -- Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) for Cox Enterprises (CEI) and its wholly owned subsidiary Cox Communications (CCI). In addition, Fitch has affirmed the individual issue ratings of CEI and its subsidiaries (as outlined below). The Rating Outlook is revised to Positive from Stable. Approximately $10.5 billion of debt outstanding as of March 31, including $8.25 billion issued by CCI is affected. Lastly, Fitch has withdrawn the 'BBB' IDR and 'BBB' senior unsecured debt rating for Cox Radio, Inc. (CXR). The ratings recognize the company's sound financial flexibility, as well as the solid operating profile and competitive position of the cable business. The ratings are also supported by the company's conservative financial policies and commitment to investment grade ratings. Further, 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. Fitch expects that CCI will generate the majority of CEI's consolidated revenues and cash flow, but notes that each of the company's segments is positioned to generate positive free cash flow over Fitch's ratings horizon. As a result, this incremental diversification of revenue and cash flow is a moderate benefit to CEI's credit profile. The Positive Outlook reflects the improvement in credit protection metrics as a result of CEI's active debt reduction in recent years. The company has achieved its 2.5 times (x) leverage target (the company's calculated leverage was 2.3x at March 31,; Fitch estimates total debt/latest 12 months [LTM] EBITDA of 2.7x on this date). Fitch does not anticipate significant further debt reduction, although the Outlook incorporates Fitch's expectations that EBITDA growth will drive modest deleveraging going forward. Fitch believes that acquisitions will remain a part of the company's growth strategy as it seeks to grow and diversify its businesses. Fitch believes that acquisitions will be conducted within the context of achieving and maintaining the 2.5x leverage ratio, and that any transactions that result in leverage above this metric will be followed by a period of focused deleveraging. 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. Fitch expects CCI's operating profile, which generated nearly 87 percent of consolidated EBITDA, will have the greatest influence on CEI's credit profile. CCI's operating profile derives its strength from its formidable subscriber clustering profile in the company's primary markets, and growing revenue diversity due to the ongoing success of its commercial business. The competitive pressure associated with the service overlap among the different telecommunications service providers, while intense, is not expected to materially change during the ratings horizon. In Fitch's opinion, CEI's cable business, and the cable industry overall, has proven to be resilient to persistent competitive pressures and weak housing formation and employment markets. The launch of a wireless business within CCI creates a quadruple play service offering and presents CCI with an opportunity to enhance its competitive position and grow revenues outside of its core cable business. Fitch expects that CCI's wireless service will be available to approximately 50 percent of its cable service area by the end of 2011. However, the execution risks surrounding the wireless business along with the related incremental capital and operating costs elevate the business risks associated with CCI's credit profile. Fitch acknowledges that CCI's decision to use a mobile virtual network operator model significantly mitigates the capital costs associated with the wireless business. In Fitch's opinion, the articulation of a 4G wireless network strategy becomes increasingly important as market leaders have accelerated 4G network deployments. Fitch expects that CCI's wireless business will contribute to the company's overall revenue growth profile during the ratings horizon, however, wireless revenues will constitute less than 5 percent of CCI's consolidated revenues by 2015. Within the cable business, ratings concerns are centered on the company's ability to adapt to changing competitive dynamics and maintain its relative market position given the challenging competitive environment, and preserve operating margins in the face of the dilutive effects related to the company's wireless initiative and ongoing gross margin pressure stemming from rising programming costs. Fitch notes that there is sufficient capacity within the company's credit profile to accommodate short term pressure on operating margins. The 'BBB' ratings incorporate the cyclical and secular challenges faced by CEI's non-cable related businesses. Cox Media Group has rebounded with the return to advertising growth but its organic growth profile remains challenged by continued pressures in newspapers and low organic growth prospects at radio and television. Manheim is expected to remain challenged through at least the next 12 months as the lagging effect of the downturn and credit crisis on used auto sales continues to cycle through. These are expected to be partially offset by continued organic growth at AutoTrader.com (ATC), as buyers continue to migrate to the internet, bolstered by recent acquisitions. Fitch expects ATC to remain acquisitive, funded either with incremental debt or equity contributions from its owners, with any activity easily accommodated in current ratings. Overall, CEI's financial flexibility and liquidity position is solid considering the company's ability to generate consistent levels of free cash flow. During the last 12 month period ended March 31, CEI generated approximately $1.5 billion of free cash flow (defined as cash flow from operations less capital expenditures and dividends). Fitch anticipates the company will generate consistent levels of free cash flow of at least $1 billion during the ratings horizon. Free cash flow will benefit from higher operating profits, partially offset by higher cash taxes due to the expected absence of tax benefits received in 2009 and 2010 associated with prior economic stimulus, as well as near-term pension funding obligations. The liquidity position is supported by the company's $3.5 billion revolver, which as of March 31, had approximately $3.2 billion available for borrowing. CEI's and CCI's sub-limits under the facility were $500 million and $3 billion respectively as of March 31. Commitments under the revolver expire on July 25, 2014. CEI has the ability to access the cash flows from all of its subsidiaries (restricted or unrestricted) with the exception of ATC in accordance with the ATC credit agreement. CEI's credit agreement does not limit dividends from its unrestricted subsidiaries (CCI and ATC) as long as net leverage is below 5.0x. CCI paid dividends of $1.75 billion in 2008, and $500 million in 2009 and 2010, which the parent used to repay debt. Fitch expects CCI will continue to pay dividends to CEI that are in-line with 2010 levels. CEI's maturity schedule is manageable and Fitch believes that the company has sufficient financial flexibility through expected free cash flow generation, available borrowing capacity from the revolver and capital market access to address the near-term maturities. Fitch expects that scheduled maturities will be refinanced as the company is operating at is 2.5x leverage target. There are no meaningful scheduled maturities for the balance of 2011. Maturities during 2012 total approximately $1 billion followed by $647 million during 2013 and $1.3 billion in 2014. The ratings could be upgraded should all of the following occur: CEI's various media businesses continue to stabilize; the company maintains its financial policies, without a sustained increase in leverage from current levels; demonstration that CCI's wireless business has not materially negatively impacted its operating profile. Negative ratings actions would occur in tandem with a change in the company's capital structure policy or an event such as a debt financed dividend or leveraging acquisition that would drive leverage higher than 3.75x for a sustained period of time. Additionally, ratings pressure could result should the capital requirements associated with CCI's wireless initiative exceed expectations and negatively affect the company's operating profile. The Issuer Default Rating (IDR) of CEI and CCI are linked in accordance with Fitch criteria. This linkage essentially gives standalone CEI credit for cash flows achieved at the CCI and other subsidiary levels (with the exception of ATC), since there are no material restrictions on cash flows between the entities and common management. While no cross defaults or cross guarantees exist between the entities, Fitch believes that CCI's probability of default would be understated (rated higher) if it did not consider CEI's businesses and weaker credit profile. At the same time, Fitch believes 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. Fitch has affirmed the following ratings with a Positive Outlook: Cox Enterprises, Inc. --IDR at 'BBB'; --Senior unsecured debt at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Cox Communications, Inc. --IDR at 'BBB'; --Senior unsecured debt at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Fitch has withdrawn the following ratings: Cox Radio, Inc. --IDR at 'BBB'; --Senior unsecured debt at 'BBB'. Additional information is available at 'fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 16, 2010); --'Rating Global Telecoms Companies' (Sept. 16, 2010); --'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (July 14, 2010). Applicable Criteria and Related Research: Corporate Rating Methodology - Amended http://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 Rating Global Telecoms Companies - Sector Credit Factors http://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205 Parent and Subsidiary Rating Linkage Criteria Report http://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826 ((Comments on this story may be sent to [email protected])) |