Fitch Rates DIRECTV's New Debt Issuance; Affirms Existing Ratings

2008-05-09 22:17:08 -

- Fitch Ratings has affirmed the 'BB' Issuer Default Rating (IDR) assigned to DIRECTV Holdings LLC (DIRECTV). In addition Fitch has assigned a 'BB+' to the company's $1 billion incremental term loan due 2013 and a 'BB' rating to DIRECTV's offering of senior unsecured notes due 2016. The Rating Outlook for all of DIRECTV's debt remains Stable. DIRECTV is a wholly owned subsidiary of The DIRECTV Group, Inc. (DTVG). (See the complete listing of the ratings affirmed by Fitch below.) Approximately $3.4 billion of debt as of March 31, 2008 is affected.

Proceeds from the issuance are expected to be dividend to DTVG and used for general corporate purposes including funding DTVG's $3 billion stock repurchase authorization. The incremental term loan facility will be secured in a similar manner and rank pari passu with the existing senior secured debt. Similar to DIRECTV's existing senior unsecured notes, the new notes will be guaranteed by substantially all of DIRECTV's subsidiaries, and will rank pari passu with the existing senior unsecured notes. The new financing does not materially change the composition of DIRECTV's debt structure as approximately 43% of the company's debt remains secured.

Pro forma for the new debt issuance, DIRECTV's leverage increases to 1.4 times (x), on an LTM (latest 12 months) basis as of the end of the first quarter. Fitch acknowledges that DIRECTV's credit profile is very strong relative to the current ratings; however, now that the transactions between News Corporation and Liberty Media Corporation (Liberty) are complete and the standstill agreement with Liberty is in place, Fitch expects that DIRECTV will increase leverage to a level reflective of the current IDR. Fitch believes that given DIRECTV's operating profile and the competitive operating environment, the company's leverage can range between 3.0x and 3.5x and maintain the 'BB' issuer default rating. Reflecting the financial flexibility inherent within DIRECTV's current ratings, the leverage target indicates the company has the capacity to add between $6.5 billion and $8.5 billion of leverage (after considering the new financing) to its balance sheet based on the first-quarter 2008 LTM EBITDA of $4.069 billion.

In Fitch's view, the new debt issuance signals the start of a gradual increase in DIRECTV's leverage profile. Fitch anticipates that proceeds from a recapitalization of DIRECTV's balance sheet will likely be used to fund share repurchases or a possible one-time dividend. Based on management commentary, acquisitions (content or otherwise) are not expected to be a high priority. Additionally, seeing that DIRECTV did not participate in the 700MHz auctions it does not appear that DIRECTV will make a significant investment in a wireless broadband network. However, Fitch views an investment in a broadband service provider as a possible use of cash.

Overall, the ratings reflect the size and scale of DIRECTV'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 DTVG) and the positive effect on average revenue per user (ARPU), margin and churn stemming from the company's success with up-selling subscribers to more advanced video services.

Rating concerns center on the evolving competitive landscape, as well as DIRECTV's lack of revenue diversity and narrow product offering relative to its cable multiple system operator (MSO) and growing telephone company competition. Fitch believes the convergence of service offerings between the cable MSOs and the telephone companies have weakened DIRECTV's competitive position, which will limit the company's growth potential and increase the business risks related to DIRECTV's credit profile over the long term. With that said, however, DIRECTV's strategy to focus on providing the best-in-class video offering especially exclusive sports programming, has provided the company with a defensible market niche, from Fitch's perspective, positioning DIRECTV to compete with cable and telephone companies, grow its subscriber base and control churn. As evidence of DIRECTV's competitive position, the company's positive subscriber and operating momentum continued during the first quarter with DIRECTV adding 275,000 net subscribers and growing its ARPU 8.6% to $79.70. The strong net additions performance was driven by a 3.8% increase in gross additions and by the company lowering its churn rate to a 10-year low of 1.36%. Importantly DIRECTV continues to add quality subscribers that have a high propensity to take HD and DVR services, which generate the highest returns and tend to churn less.

DIRECTV's liquidity position is supported by the $500 million of available borrowing capacity from the revolver contained in the company's credit facility and expected free cash flow generation (before any potential dividend payment to DTVG). During the first quarter DIRECTV generated approximately $405 million of free cash flow, including a $100 million dividend to DTVG, reflecting a 55% increase compared to the same period last year. Free cash flow generation was supported by a 25% reduction in capital expenditures and EBITDA growth. For all of 2008 Fitch expects the company to generate approximately $1.3 billion of free cash flow (before dividends to DTVG) representing a 125% increase relative to the free cash flow generated during 2007.

The Stable Rating Outlook incorporates Fitch's expectation that any potential recapitalization of DIRECTV's balance sheet will demonstrate a credit protection metrics consistent with a 'BB' credit profile.

Fitch affirms the following ratings:

DIRECTV Holdings, LLC

--IDR at 'BB';

--Senior secured debt at 'BB+';

--Senior unsecured debt at 'BB'.

Fitch has assigned the following new ratings

DIRECTV Holdings, LLC

--Incremental term loan due 2013 'BB+';

--Senior unsecured notes due 2016 'BB'.

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.

Fitch Ratings
David Peterson, +1-312-368-3177 (Chicago)
Michael Weaver, +1-312-368-3156 (Chicago)
Brian Bertsch, +1-212-908-0549
(Media Relations, New York)