(The following statement was released by the rating agency)
CHICAGO, April 02 (Fitch) Fitch Ratings has assigned a 'BB-' rating to DISH DBS
Corporation's (DDBS) proposed $1 billion offering of senior secured notes. DDBS
is a wholly owned subsidiary of DISH Network Corporation (DISH, Fitch Issuer
Default Rating of 'BB-'). Proceeds from the offering are expected to be used for
general corporate purposes including spectrum-related transactions which will
support the company's unspecified wireless strategy. The Rating Outlook for all
of DISH's ratings remains Negative. DISH had approximately $11.9 billion of
debt outstanding as of Dec. 31, 2012.
Key Rating Drivers
The key rating factors that reflect the rating include:
--Weakening credit protection metrics;
--Lack of visibility and elevated event risks related to DISH's wireless
--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 its financial flexibility at the current ratings level. On a pro forma
basis (assuming a $1 billion issuance), total debt outstanding as of Dec. 31,
2012 increased nearly 72% relative to year-end 2011 levels to approximately
$12.9 billion. DISH's leverage increased to 4.3x on a pro forma basis as of
Dec. 31, 2012 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. DISH's wireless strategy
continued to evolve as evidenced by the company's proposal to enter into a
multi-faceted, complicated series of agreements with Clearwire Corporation.
Fitch believes the likelihood of Clearwire accepting DISH's offer is low. Some
of DISH's initial proposal is not likely permitted under the terms of
Clearwire's current legal and contractual obligations. Clearwire's decision to
take advantage of interim financing offered by Sprint Nextel complicates DISH's
offer and further diminishes the probability that DISH's offer will ultimately
prevail. DISH had previously stated it would withdraw its offer if Clearwire
drew on the Sprint Nextel financing.
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% of Clearwire's
wireless spectrum for $2.2 billion and a minimum of 25% of Clearwire's
outstanding common stock.
The company's liquidity position is strong and supported by cash and marketable
securities on hand and expected, but diminishing free cash flow generation. Cash
marketable security balances, pro forma for the contemplated senior note
issuance, increase to approximately $8.2 billion. 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 approximately $601 million of free cash flow (defined as cash
flow from operations less capital expenditures and dividends) during the LTM
ended Dec. 31, 2012. 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 (before consideration of dividend policy) 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
a 16.5% year-over-year decline of DISH's 2012 EBITDA. EBITDA margin during the
current period fell 450 basis points compared to last year, to 20.9%. Fitch
expects margins to rebound somewhat during 2013 as the company has elected to
take a price increase.
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 Ratings, Inc.
70 W. Madison,
Chicago, IL 60602
John Culver, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
Additional information is available at 'www.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, 2012);
--'Rating Telecom Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research
Rating Telecom Companies
Corporate Rating Methodology
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