Fitch Ratings has assigned a 'BBB-' rating to DIRECTV Holdings LLC's (DTVH) 3.55% senior notes due 2015, 5.20% senior notes due 2020 and its 6.35% senior notes due 2040. The notes were co-issued with DIRECTV Financing Co., Inc. DTVH is an indirect wholly owned subsidiary of DIRECTV (DTV). Similar to DTVH's existing senior unsecured notes, the new senior unsecured notes are guaranteed by certain of DTVH's operating subsidiaries and will rank pari passu with the existing senior unsecured notes. The notes contain usual and customary covenants reflective of investment grade debt security and contain cross-default provisions to the company's existing senior unsecured debt. Fitch's current Issuer Default Rating for DTVH is 'BBB-', with a Stable Outlook. As of Dec. 31, 2009, DTVH had approximately $6.8 billion of debt outstanding.
Proceeds from the offering are expected to be used for general corporate purposes including the prepayment of DTVH's Term Loan C issued under the company's senior secured credit facility. As of Dec. 31, 2009 approximately $979 million of principal remained outstanding under the Term Loan C. A portion of the proceeds may also be distributed to DTV to repurchase DTV shares.
Overall, the ratings for DTVH reflect the size and scale of DTVH's operations as the second-largest multichannel video programming distributor in the United States, Fitch's expectation for continued generation of free cash flow (before dividends to DTV), and the company's high level of financial flexibility within the existing ratings category. Before dividends to DTV, DTVH generated approximately $2.2 billion of free cash flow. Fitch anticipates modest free cash flow growth during 2010 driven by mid-single-digit revenue growth coupled with EBITDA margin expansion and reduced capital expenditures. The ratings also incorporate DTVH's strong operating momentum fostered by the company's strategy of targeting high-quality subscribers. This strategy in Fitch's opinion yields higher average revenue per user (ARPU), operating margins, and lifetime subscriber revenue and cash flows while lowering subscriber churn levels.
DTVH's issuance is in line with Fitch's expectations within the context of DTV's more conservative leverage (debt-to-EBITDA) target of 2.5 times (x). DTVH's leverage as of Dec. 31, 2009 was 1.44x; considering this most recent offering DTVH's leverage is 1.87x. Fitch believes that returning capital to its shareholders will remain a priority for the company, as DTV historically has used free cash flow generated by DTVH to fund large share repurchase programs. During the course of 2009 DTVH paid $2.5 billion in dividends to its parent company and has paid an additional $1.5 billion in 2010. DTV board of directors announced a $3.5 billion share repurchase authorization in February 2010. Fitch expects the company will exhaust this authorization by the end of 2010.
Rating concerns center on the evolving competitive landscape, DTVH's lack of revenue diversity and narrow product offering relative to its cable multiple system operator (MSO) and growing network-based telephone company video competition, and finally DIRECTV's ability to balance subscriber growth with growing operating margins and free cash flow.
DTVH's liquidity position is strong and supported by the $500 million of available borrowing capacity from the revolver (maturing April 2011) contained in the company's senior secured credit facility, expected free cash flow generation (before any potential dividend payment to DTV) and approximately $1.7 billion of cash on hand as of Dec. 31, 2009. Scheduled maturities are well within expected free cash flow generation and consist primarily of scheduled amortization from the company's credit facility. Scheduled maturities during 2010 total approximately $298 million when adjusted for the prepayment of Term Loan C and $98 million in 2011. During 2012 approximately $10 million of debt is scheduled to mature followed by approximately $932 million in 2013.
These rating actions reflect the application of Fitch's current criteria which are available at www.fitchratings.com and specifically include the following reports:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Additional information is available at www.fitchratings.com.
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Fitch Ratings, Chicago
David Peterson, +1-312-368-3177
Michael
Weaver, +1-312-368-3156
or
Cindy Stoller, +1-212-908-0526
(Media
Relations, New York)
cindy.stoller@fitchratings.com
