Fitch Maintains DIRECTV Holdings on Rating Watch Positive

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings is maintaining the 'BBB-' Issuer Default Rating (IDR) and senior unsecured debt ratings for DIRECTV Holdings (DTVH) on Rating Watch Positive. DTVH was placed on Rating Watch Positive following the May 2014 announcement of the acquisition of DIRECTV by AT&T Inc. (AT&T). DTVH is a wholly owned indirect subsidiary of DIRECTV.

DTVH's Positive Watch reflects a potential upgrade due to AT&T's ownership of the company following the close of the transaction and strong strategic ties. AT&T's IDR is 'A-' with a Stable Outlook. DTVH's final rating will depend on an evaluation of AT&T's financial policies with respect to DTVH's debt and the degree of linkage to AT&T's rating. The acquisition is expected to be completed by the end of the second quarter of 2015, following the necessary regulatory approvals.

Fitch's Rating Watches indicate a heightened probability of a rating change and the likely direction of such a change. They are typically event-driven and, as such, are generally resolved over a relatively short period unless there is an ongoing situation to be resolved such as a merger or acquisition, in which case the rating is reviewed annually. Fitch has reviewed DTVH's rating given that the acquisition has taken longer to close than originally anticipated at the time of the original announcement in May 2015.

KEY RATING DRIVERS

DTVH's current ratings incorporate Fitch's expectation for continued generation of free cash flow (FCF; before dividends to DIRECTV) and DTVH's high level of financial flexibility within the existing ratings category. In addition, DIRECTV's Latin American (DTVLA) business segment has strong long-term growth prospects. The consolidated credit protection metrics are consistent with Fitch's expectations and strongly positioned within the current rating category.

Consolidated leverage for the LTM ended March 31, 2015 was 2.32x, a modest decline from yearend 2014 which was 2.46x. However, pro forma 2014 leverage was 2.32x, excluding $1.2 billion of notes issued in December 2014 used to refinance a March 2015 maturity of the same amount. FFCF has been strong, as DIRECTV generated approximately $3.2 billion over the last 12 months ended March 31, 2015. Fitch expects similar levels of FCF over the next couple of years.

The current ratings factor in the company's lack of revenue diversity and video-centric service offering relative to its cable MSO and telephone company competition, which limit the company's longer-term growth prospects in the U.S. Results have not yet diverged as of yet, as in the U.S., DIRECTV's revenue growth was 5.4% in 2014, in line with its major peers.

DTVLA represents the company's most significant long-term growth opportunity. Fitch expects incremental pay-TV penetration gains will largely come from the emerging middle markets as relatively high penetration rates among high-end households within the region limit the growth potential of this segment. DTVLA's focus is capturing market share further down the economic spectrum in the middle markets while balancing subscriber churn and profitability.

In addition to FCF generation, the company's liquidity position is supported by the collective available borrowing capacity under its $2.5 billion revolvers (consisting of a $1 billion revolving credit facility (RCF) maturing February 2016 and a $1.5 billion RCF maturing in September 2017) all of which was available for borrowing as of March 31, 2015. These facilities support DTVH's $2.5 billion commercial paper program, of which there were no outstandings as of March 31, 2015. Consolidated cash totaled approximately $4.3 billion as of March 31, 2015. At DTVH, there was $2.8 billion in cash on March 31, 2015.

The company's maturity schedule is well-laddered and also adds to its overall financial flexibility. Following the March 2015 debt repayment, remaining 2015 maturities are nominal. In 2016, $2.3 billion matures.

DIRECTV's downstream guaranty of DTVH's senior unsecured notes has a neutral effect on DTVH's credit profile, in Fitch's opinion. DTVH bondholders will benefit from the cash flows generated from DIRECTV's businesses owned outside of DTVH, including DIRECTV Latin America Holdings, Inc. and DIRECTV Sports Networks, LLC.

KEY ASSUMPTIONS

--Fitch assumes revenues will grow in the low- to mid-single digits over the near term, and that margins will remain relatively stable in the mid-20% range.

--DIRECTV's stock repurchase program is suspended owing to the agreement with AT&T. Fitch believes that the company will continue to build cash as it progresses to the acquisition by AT&T.

RATING SENSITIVITIES

The rating sensitivities are reflective of DIRECTV on a stand-alone basis.

Positive Rating Action: DIRECTV's credit protection metrics are consistent with Fitch's expectations and management's target. A positive rating action would likely follow the assumption of a more conservative financial strategy, in the absence of any material erosion of the operating profile of DIRECTV's U.S. business segment that would reduce leverage to 2.0x on a sustainable basis. Additionally, the growing importance of the Latin American segment, in terms of revenue, EBITDA and FCF generation, could lead to positive rating actions holding the operating profile of the company's U.S. business constant.

Negative Rating Action: A negative rating action would likely coincide with the company adopting a weaker leverage target or an event such as a debt-financed dividend or leveraging transaction that increases leverage to higher than 3.5x in the absence of a credible deleveraging plan. Moreover, any change in the existing guaranty structure or a sale of DIRECTV's ownership stake in DTVLA may result in negative rating actions.

Fitch has maintained the following ratings on Rating Watch Positive:

DIRECTV Holdings LLC

--Long-Term IDR 'BBB-';

--Senior unsecured credit facilities 'BBB-';

--Senior unsecured notes 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Ratings Navigator Companion' (Nov. 17, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984864

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150518006694/en/

Fitch Ratings
Primary Analyst
John C. Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Bill Densmore
Senior Director
+1-312-368-3125
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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