S&P Keeps Charter Communications (CHTR) on CreditWatch Positive Amid Time Warner Cable (TWC) Deal

Standard & Poor's Ratings Services today said it kept its ratings on Charter Communications (Nasdaq: CHTR), including its 'BB-' corporate credit rating, on CreditWatch, where we placed them with positive implications on March 31, 2015.

All issue-level ratings, including our 'BB+' senior secured issue-level rating and 'BB-' unsecured issue-level rating, remain on CreditWatch with positive implications.

"The continued CreditWatch listing reflects the potential for a two-notch upgrade of Charter if the acquisitions of TWC and BHN close under the proposed terms," said Standard & Poor's credit analyst Michael Altberg.

Assuming a 50% cash consideration for TWC (no optional cash election) and that Liberty invests an additional $5 billion toward both acquisitions, we expect pro forma adjusted leverage to increase to about 4.6x from 4.5x in 2014, and possibly to decline to the low-4x area within 12 months of the acquisition close. Including the $15 cash election, we estimate pro forma leverage would be closer to 5x, declining to the mid-4x area within 12 months. We view this as consistent with Charter's stated leverage tolerance of 4.0x-4.5x, plus or minus 0.5x. A two-notch upgrade would depend upon Charter operating within this range longer term. Following the transaction, we expect that TWC shareholders would own about 40%-44% of the new Charter, with Liberty and Advance/Newhouse owning 19%-20% and 13%-14%, respectively.

The continued CreditWatch listing reflects the potential for a two-notch upgrade of Charter assuming both transactions close as contemplated, including the proposed mix of debt and equity funding and no material asset sales. Given the shareholder and regulatory process, we believe the likely timing of the deals closing would be late 2015 to early 2016. We will continue to monitor developments around the proposed transactions and update our CreditWatch listing accordingly.

Key points:

• U.S. cable operator Charter Communications Inc. announced today that it has entered into a definitive agreement to acquire Time Warner Cable Inc. (TWC) for $195.71 per share, or an approximate $56.7 billion equity valuation.
• The proposed transaction consists of a $100 per share cash consideration, with the remaining consideration in Charter stock. There is also a $15 per share cash election at the option of shareholders. We expect Liberty Broadband (Liberty) will invest an additional $4.3 billion in the TWC acquisition in exchange for equity in the new company.
• In addition, Charter has confirmed its agreement to acquire Bright House Networks (BHN) for $10.4 billion, contingent on the Charter and TWC deal closing. As previously agreed, Liberty will invest an additional $700 million in this acquisition.
• Pro forma for both transactions, we estimate that adjusted leverage will be about 4.6x for the consolidated entity, declining to the low-4x area within 12 months on organic EBITDA growth and modest cost synergies.
• We are keeping our ratings on Charter on CreditWatch with positive implications, which reflects the potential for a two-notch upgrade of the company assuming both transactions close as contemplated, including the proposed mix of debt and equity funding and no material asset sales.

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