Fitch Affirms DISH's IDR at 'BB-'; Outlook Remains Negative [Manufacturing Close - Up]
(Manufacturing Close - Up Via Acquire Media NewsEdge) Fitch Ratings affirms the 'BB-' Issuer Default Rating (IDR) assigned to DISH Network Corp. (DISH) and its wholly owned subsidiary DISH DBS Corp. (DDBS).
Fitch has also affirmed the 'BB-' rating assigned to the senior unsecured notes issued by DDBS. The Rating Outlook for all of DISH's ratings remains Negative. DISH had approximately $10.4 billion of debt outstanding as of Sept. 30.
Key Rating Drivers
The key rating factors reflected by the ratings include:
--Weakening credit protection metrics;
--Lack of visibility and elevated event risks related to DISH's wireless strategy;
--Strong liquidity and free cash flow generation;
--Inconsistent operating results.
DISH's credit profile has weakened considerably during the course of 2012 due to inconsistent operating performance and elevating debt levels, which together with the uncertainty related to the company's yet articulated wireless strategy, limits the company's financial flexibility at the current ratings level. On a pro forma basis, total debt outstanding as of Sept. 30, increased nearly 59 percent relative to year-end 2011 levels to approximately $11.9 billion. DISH's leverage increased to 3.8x on a pro forma basis as of Sept. 30, calculated on a last 12 month (LTM) basis. The cash proceeds from the company's incremental debt issuances have largely remained on its balance sheet purportedly to support DISH's wireless strategy.
The Negative Outlook encompasses the lack of visibility as well as the potential capital and execution risks associated with DISH's wireless strategy. The economic viability of the strategy is questionable given the presence of strong entrenched market participants particularly if DISH's wireless offering fails to provide any meaningful service differentiation from established competitive offerings. Fitch acknowledges that a wireless network can potentially provide DISH with further strategic flexibility and enable the company to diversify its business and capture incremental revenue and cash flow growth.
Event risks are elevated as the company contemplates additional acquisitions of spectrum or assets to support the wireless strategy. To that end, the evolution of DISH's wireless strategy took a step forward as evidenced by the company's proposal to enter into a multi- faceted, complicated series of agreements with Clearwire Corp. Fitch Ratings believes the proposed transaction is a positive development for DISH, but could also pressure its current ratings.
If the bid for Clearwire is successful, DISH would secure a potential partner to build and deploy a wireless network. DISH had previously signaled its preference to participate in a network infrastructure sharing arrangement to enter into the wireless market as opposed to deploying a greenfield wireless network. However, recent consolidation, investments and spectrum acquisitions within the wireless sector has reduced the number of potential entities DISH can partner with to deploy its wireless network creating an urgency to establish a partnership with Clearwire. In accordance with the terms of DISH's proposal, DISH would acquire, among other things, approximately 24 percent of Clearwire's wireless spectrum for $2.2 billion and a minimum of 25 percent of Clearwire's outstanding common stock.
DISH secured FCC approval to use 40 MHz of S-band wireless spectrum (now designated as the AWS - 4 band). The FCC order includes power limitations on a portion of DISH's uplink spectrum and requires DISH to tolerate potential interference from adjacent wireless spectrum. The order requires DISH to provide reliable signal coverage and terrestrial service to 40 percent of its total AWS - 4 population within four years. The final build-out milestone requires signal coverage and service to 70 percent of population in each of its license areas within seven years. If DISH fails to meet the interim build-out requirement, the final build-out requirement will be accelerated from seven years to six years. Furthermore, if the final build-out requirement is not satisfied, DISH's license for each economic area not in compliance with the final build-out requirement will terminate automatically.
The company's liquidity position is strong and supported by cash and marketable securities on hand and expected free cash flow generation. Cash marketable security balances, pro forma for the $1.5 billion senior note issuance during December 2012, increase to approximately $7.9 billion. Fitch notes that the company used approximately $700 million in cash to settle litigation and $450 million to fund a $1 per share special dividend. The company also benefits from a favorable maturity schedule, as the next scheduled maturity is in 2013 totaling $500 million followed by $1 billion during 2014. Fitch notes, however, that the company does not maintain a revolver, which increases DISH's reliance on capital market access to refinance current maturities, elevating the refinancing risk within the company's credit profile. The risk is offset by the company's consistent access to capital markets and strong execution.
DISH generated nearly $857 million of free cash flow (defined as cash flow from operations less capital expenditures and dividends) during the LTM ended Sept. 30. Fitch expects capital intensity will be relatively consistent over the near term and that capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment. Absent further investment in a wireless network or other strategic initiative, Fitch anticipates that DISH will continue generating nearly $1 billion of annual free cash flow during the current ratings horizon while incorporating higher levels of cash taxes.
Fitch believes the company's overall credit profile has limited capacity to accommodate DISH's inconsistent operating performance. While subscriber metrics remain weak, they have stabilized somewhat when compared to 2011 results. However, DISH struggles to increase service ARPUs as the company elected not to take a price increase during 2012. This decision combined with higher programming and subscriber acquisition costs has had a dramatic effect on the company's operating margins and EBITDA generation. These factors contributed to an 18.7 percent year-over-year decline in DISH's third-quarter EBITDA. EBITDA margin during the current period fell 400 basis points compared to the third quarter of last year, to 19.9 percent.
Additional rating concerns center on DISH's ability to adapt to the evolving competitive landscape, DISH's lack of revenue diversity and narrow product offering relative to its cable MSO and telephone company video competition, and an operating profile and competitive position that continue to lag behind its peer group. DISH's current operating profile is focused on its maturing video service offering and lacks growth opportunities relative to its competition.
Revision of the Outlook to Stable at the current rating level can occur as the company demonstrates that it can execute its wireless strategy in a credit-neutral manner. In addition operating metrics, in particular subscriber additions, ARPU growth and EBITDA margins will need to begin to trend positive.
Fitch believes negative rating action will likely coincide with the company's decision to execute a wireless strategy, or other discretionary management decisions that weaken its ability to generate free cash flow, erode operating margins, and increase leverage higher than 5x without a clear strategy to de-lever the company's balance sheet.
Fitch has affirmed the following ratings with a Negative Rating Outlook:
DISH Network Corp.
--IDR at 'BB-'.
DISH DBS Corp.
--IDR at 'BB-';
--Senior unsecured notes at 'BB-'.
Additional information is available at 'fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the ratings process, or provide additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8,);
--'Rating Telecom Companies' (Aug. 9,).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://fitchratings.com/creditdesk/reports/ report_frame.cfm rpt_id=684460
Rating Telecom Companies
http://fitchratings.com/creditdesk/reports/ report_frame.cfm rpt_id=682323
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