CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) assigned to DIRECTV Holdings LLC (DTVH). Fitch has also affirmed specific issue ratings assigned to DTVH as outlined below. DTVH is a wholly owned indirect subsidiary of DIRECTV. As of June 30, 2011 DTVH had approximately $13.5 billion of debt outstanding.
Overall the ratings for DTVH reflect the size and scale of DTVH's operations as the second largest multi-channel video programming distributor (MVPD) in the United States with nearly 19.5 million video subscribers as of June 30, 2011, Fitch's expectation for continued generation of free cash flow (before dividends to DIRECTV), and the company's high level of financial flexibility within the existing ratings category. These considerations, along with the company's 2.5 times (x) long-term leverage target and an operating strategy primarily focused on targeting high-value subscribers and controlling subscriber churn, strongly position the company's credit profile within the current rating.
Ratings concerns center on DTVH's ability to adapt to the evolving competitive landscape and difficult economic conditions, and the company's lack of revenue diversity and narrow produce offering relative to its cable MSO and telephone company competition. Market conditions are exasperated by weak housing formation conditions and increasingly competitive promotional offers. The ratings also incorporate Fitch's belief that DTVH's satellite infrastructure can put the company at a competitive disadvantage relative to its competition's respective technology and network positions as video content is increasingly consumed over alternate platforms and devices.
Notwithstanding its video centric service offering, DTVH has a strong competitive position. However video services are a mature product with, in Fitch's opinion, limited revenue and subscriber growth potential, especially when considering DTVH's high penetration of subscribers that take advanced video service products. In Fitch's view DTVH's ability to innovate its video service to, among other things, establish a path to become more IP-video enabled is critical for the company to maintain its competitive position, grow video ARPU and expand operating margins.
A video service provider's ability to deliver video content anywhere, anytime, and to any device has become the competitive focus within the multichannel video programming segment. To that end, DTVH's connected box strategy, while experiencing initial operational difficulties, positions the company to diversify its content delivery platform, and expand video ARPU through enhanced video on demand services. Other company initiatives such as a new HD program guide and its Nomad service (porting content from DVR to tablets) are expected to launch during the fourth quarter of 2011.
DTVH is operating at its established leverage target. As of the LTM period ended June 30, 2011, the company's leverage was 2.49x. DTVH's credit protection metrics are consistent with Fitch's expectations and strong for the rating category. Going forward Fitch expects DIRECTV's capital allocation strategy will continue to center on its share repurchase program while managing DTVH's balance sheet to its 2.5x leverage target. As of June 30, 2011 the company had $3.4 billion of capacity remaining under its current share repurchase authorization. The company indicates that the pace of share repurchases will remain unchanged at $100 million per week.
Based on Fitch's expectation for continued free cash flow generation (before dividends to its parent company), Fitch believes DTVH's overall financial flexibility and liquidity position is strong. DTVH generated approximately $2.0 billion of free cash flow (before dividends to DIRECTV) during the last twelve month period ended June 30, 2011. Fitch anticipates modest free cash flow growth driven by mid-single digit revenue growth along with stable EBITDA margins and consistent capital spending in the range of $1.6 billion annually.
In addition to free cash flow generation the company's liquidity position is supported by available borrowing capacity under its $2.0 billion revolver (as of June 30, 2011 all of which was available) and $1.3 billion of cash as of June 30, 2011. Commitments under the revolver are set to expire during February 2016. The company's favorable maturity schedule also adds to its overall financial flexibility. As of June 30, 2011, DTVH's next scheduled maturity is not until 2014 when $1.0 billion of senior unsecured notes will mature.
The Stable rating Outlook reflects Fitch's expectation that the company's operating profile will remain relatively consistent during the near term, recognizing competitive pressures and weak economic and housing conditions. Negative rating action would likely coincide with the company taking on a more aggressive leverage target or an event such as a debt financed dividend or leveraging transaction that drives leverage higher than 3.5x for a sustained period of time.
Fitch has affirmed the following ratings with a Stable Outlook:
DIRECTV Holdings LLC
--IDR at 'BBB-';
--Senior Unsecured Debt
at 'BBB-'
Fitch has assigned the following rating:
--Senor Unsecured Credit
Facility 'BBB-'
Fitch has withdrawn the following rating:
--Senior Secured Credit
Facility 'BBB'
Additional information is available at 'www.fitchratings.com.'
The
issuer did not participate in the rating process, or provide additional
information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 16, 2010);
--'Rating Global Telecoms Companies'
(Sept. 16, 2010)
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Rating
Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
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