Fitch Ratings has assigned a 'BB-' rating to DISH DBS Corporation's (DDBS) proposed $300 million offering of senior unsecured notes. The notes are expected to be placed under the Securities and Exchange Commission's rule 144A. 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. As of June 30, 2009, DISH had approximately $5.1 billion of debt outstanding. The Rating Outlook is Negative.
From Fitch's perspective, today's issuance, coupled with DDBS' issuance of $1 billion of 7.875% senior notes due 2019, will bolster DISH's somewhat constrained liquidity position (relative to a historical perspective) and Fitch believes that DISH's credit profile has sufficient flexibility to accommodate a modest increase in leverage. Cash balances as of June 30, 2009 totaled approximately $113 million. Additional liquidity can be derived from nearly $838 million of variable-rate demand notes held by DISH. Fitch notes that DISH does not maintain a revolver to support its liquidity position. Cash balances pro forma for the issuance of the 7.875% senior notes and today's proposed offering approximated $1.4 billion as of June 30, 2009.
DISH's leverage on a latest 12-month basis as of June 30, 2009 was 1.75 times (x), and is expected to increase to 2.2x on a pro forma basis considering the new debt issuance.
Cash balances have been depleted to some extent due to large cash requirements during 2008 related to the spinoff of Echostar Corporation, acquisition of 700-megahertz (MHz) wireless spectrum, the redemption of senior notes and subordinated debt, and the cash payment to Tivo, Inc. (Tivo) related to ongoing litigation. While Fitch expects DISH will continue to generate material amounts of free cash flow during the ratings horizon, the company's liquidity position will remain a rating issue given the uncertain cash requirements related to the litigation with Tivo. The U.S. District Court in Texas in June 2009 awarded Tivo $103 million in supplemental damages and interest for the period from September 2006 to April 2008. The court's decision has been stayed pending DISH's appeal to the Federal Circuit Court of Appeals. Additionally, on Sept. 2, 2009 the U.S. District Court awarded Tivo $200 million in contempt sanctions for violating a court-ordered permanent injunction from April 2009 through July 2009.
Overall, Fitch's ratings reflect the operating leverage derived from DISH's size and scale as the third-largest multichannel video programming distributor in the U.S., and Fitch's expectation for continued free cash flow generation. The Negative Rating Outlook reflects DISH's deteriorating operating profile and eroding competitive position in an increasing competitive environment. DISH reported a subscriber churn rate of 1.73%, marking a 14 basis point year-over-year decline. The second-quarter churn rate was the first year-over-year decline since June of 2007. In comparison, DIRECTV Group, Inc.'s U.S. segment churn during the second quarter was 22 basis points lower at 1.51%. The higher churn rate continues to be driven by a combination of economic, competitive and operational factors, including piracy and fraud. In Fitch's opinion, some of these factors, such as higher non-pay disconnects and decreased customer satisfaction, appear to require longer-term fixes, and churn may remain elevated for an extended period of time, reflecting the company's relatively weak competitive position.
Net additions during the second quarter were approximately 26,000, marking the first quarter of positive net subscriber additions since the 1Q'08. While the second quarter subscriber additions metrics were positive, net subscriber additions during 1H'09 were negative.
During 1H'09, DISH generated approximately $780 million of free cash flow (defined as cash flows from operating activities less capital expenditures and dividends) reflecting a 4.2% decline compared with the free cash flow generated during 1H'08. An 11.7% reduction in capital expenditures during 1H'09 (relative to 1H'08) was more than offset by an EBITDA decline during 1H'09 of nearly 9%. Fitch expects that DISH's weakened operating profile will continue pressuring free cash flow generation during the balance of 2009 and 2010.
Factors that could lead to a revision of the Rating Outlook to Stable include a determination that DISH's liquidity position is balanced with cash requirements, free cash flow expectations, capital market access, further clarity surrounding potential cash requirements related to the Tivo litigation and wireless network strategy, and sustainable positive trends in operating results, particularly subscriber churn. Key considerations that could lead to a downgrade of DISH's ratings include, but are not limited to, DISH's inability to reverse the negative operating trends and improve its competitive positioning, a sustained erosion of DISH's free cash flow generation, and further deterioration of DISH's liquidity profile.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
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