|[July 20, 2012]
Fitch: DISH DBS' Additional Offering Has No Rating Impact
CHICAGO --(Business Wire)--
Fitch Ratings indicates that DISH DBS Corporation's (DDBS) $1 billion
offering of senior notes will have the same 'BB-' rating as the
company's 5.875% senior notes due 2022 issued May 2012. The notes will
be issued as additional 5.875% senior notes due 2022. DDBS is a wholly
owned subsidiary of DISH Network Corporation (DISH; Issuer Default
Rating of 'BB-'). Proceeds from the offering are expected to be used for
general corporate purposes. DISH had approximately $7.5 billion of debt
outstanding as of March 31, 2012. The Rating Outlook is Negative.
The Negative Outlook encompasses the capital and execution risks
associated with DISH's wireless strategy. While DISH has yet to fully
articulate its wireless strategy, the company has committed over $3.5
billion of capital to acquire wireless spectrum. Fitch believes the
incremental capital and operating costs associated with a potential
wireless network build out will diminish DISH's ability to generate free
cash flow, erode operating margins resulting in a weaker credit profile
and pressuring the current ratings. Fitch believes the business risk
inherent in launching a wireless business limits the flexibility the
company has to increase leverage at the current ratings to accommodate
the incremental capital costs and EBITDA erosion associated with the
launch of a wireless network. Construction of a stand alone wireless
network would have additional negative rating implications.
Fitch believes the company's overall credit profile is relatively strong
within the current rating category considering the business risks
attributable to DISH's core operations and the current rating has
sufficient flexibility to accommodate DISH's inconsistent operating
performance. However, DISH has one of the weaker competitive positions
within the multi-channel video programming distributor sector, in
Fitch's opinion. DISH's market positioning as a low cost and value
service provider is not sustainable as all market participants are
aggressive with promotional offers in an increasingly mature video
DISH lost approximately 10,000 subscribers during the seasonally weak
second quarter of 2012 and has gained approximately 5,000 subscribers
during the last 12 month period ended June 30, 2012. DISH is in the
process of re-positioning its brand away from a value proposition to a
more technology and product focus. DISH's challenge is to re-energize
subscriber growth without sacrificing subscriber economics (arguably
already weak) or credit quality. Key to a successful transition will be
the company's ability to reduce churn while introducing new products and
services valued by subscribers that are not easily replicated by
DISH's credit profile has remained stable notwithstanding the
inconsistent operating performance. Total debt as of March 31, 2012 was
approximately $7.5 billion, relatively consistent with the debt level as
of year-end 2011. DISH's leverage was 2.16x on an LTM basis as of March
31, 2012, which is consistent with year-end 2011 measures and strog for
the rating category. Pro forma for the issuance (including the May 2012
issuance), DISH's leverage increases to 3.0x as of March 31, 2012.
Absent further investment supporting the company's wireless strategy or
shareholder friendly initiatives, Fitch expects DISH's debt level will
remain consistent and for leverage to approximate 2.9x by year-end 2012.
The company's liquidity position is strong and supported by cash and
marketable securities on hand and expected free cash flow generation.
The company also benefits from a favorable maturity schedule as the next
scheduled maturity is in 2013 totaling $500 million. As of March 31,
2012, DISH had a total of nearly $2.7 billion of cash and marketable
securities (current portion) - reflecting a 32% increase compared with
liquidity measures as of Dec. 31, 2011.
Fitch does note, 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 $690 million of free cash flow (defined as cash
flow from operations less capital expenditures and dividends) during the
first quarter of 2012 following $902 million of free cash flow during
all of 2011. 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 relatively stable levels of free cash flow during the current
ratings horizon while incorporating higher levels of cash taxes.
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
continues 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.
The ratings also incorporate Fitch's belief that DISH's satellite based
infrastructure can put the company at a competitive disadvantage,
relative to the cable MSO and telephone company's respective technology
and network positions, as video content is expected to be increasingly
consumed over alternative platforms and devices such as wireless (4G)
and higher-speed broadband networks.
Stabilization of the Outlook at the current rating level can occur as
the company demonstrates that it can execute its wireless strategy in a
credit neutral manner.
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 the company's ability to generate free
cash flow, erode operating margins and increase leverage higher than 4x
without a clear strategy to de-lever the company's balance sheet.
Additional information is available at 'www.fitchratings.com'.
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. 12, 2011);
--'Rating Global Telecoms Companies' (Sept. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Global Telecoms Companies - Sector Credit Factors
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