Fitch Places Time Warner Cable's 'BBB' IDR on Rating Watch Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has placed Time Warner Cable's (TWC) 'BBB' Issuer Default Rating (IDR) on Rating Watch Negative. The 'F2' short-term IDR and the senior unsecured issuer ratings have also been placed on Rating Watch Negative. A full list of rating actions follows at the end of this release. Approximately $23.3 billion of debt, including $638 million of commercial paper outstanding as of March 31, 2015 is affected by today's rating action.

Fitch's rating action follows the announcement that TWC has entered into a definitive agreement to merge with Charter Communications, Inc. (Charter) in a transaction valued at approximately $79 billion. Total consideration consists of $100 in cash and shares of Charter equivalent to 0.5409 shares of Charter for each TWC share outstanding. In addition, Charter will provide an election option for each TWC stockholder (other than Liberty Broadband Corporation) to receive $115 of cash and Charter shares equal to 0.4562 shares of Charter for each TWC share. The transaction values TWC at 9.1x enterprise value (based on 2015 EBITDA estimates) and 8.3x adjusted for synergies and tax benefits.

The transactions are subject to approval by the shareholders of Charter and TWC as well as customary regulatory reviews. Charter's announced acquisition of Bright House Networks (BHN) for approximately $10.4 billion is contingent on the closing of Charter's acquisition of TWC. However, the TWC acquisition is not contingent upon the closing of BHN. The parties expect the transactions will close by the end of 2015.

On a pro forma basis the combined company will serve 24 million customer relationships and become the second largest cable multiple system operator in the country. Pro forma revenues totalled approximately $36 billion during 2014 and EBITDA was approximately $13 billion.

In reviewing the transaction, Fitch will focus on the financing of the transaction, a review of the capital structure of the combined entity and reliance on secured debt to fund the transaction, a review of potential synergies, and the outcome of the regulatory review process, among other factors. In evaluating the proposed capital structure of the combined entity, Fitch will consider the cash flow generating ability of the assets securing the TWC bonds. Fitch believes that secured leverage at or below 4x is reflective of low investment-grade issue ratings. Fitch anticipates linking the IDRs of Charter and TWC in accordance with its existing criteria.

Fitch anticipates resolving the Negative Watch around the time of the closing of the transaction, with an earlier resolution a possibility upon the clear understanding of the combined entity's capitalization structure and regulatory review approvals. The transaction may result in a multiple-notch downgrade of TWC's existing senior unsecured notes depending on the final capitalization structure of the combined entity.

KEY RATING DRIVERS

--Fitch recognizes the enhanced scale and subscriber clustering profile of the combined entity which should lead to a stronger competitive position and enable the combined company to capitalize on anticipated cost synergies and lower programming costs. Additionally, the transaction provides a larger opportunity to compete in the medium- and- large commercial space.

--Continued network investment to improve video service offering and drive faster high-speed data service will elevate capital expenditures over the near term but should result in a stronger overall operating profile as the company grows average revenue per customer relationship and homes passed.

--Fitch views the equity proportion of total consideration favorably and expects pro forma leverage of approximately 4.5x when the transaction closes.

--Fitch expects the pro forma capital structure will rely heavily on secured debt, as the existing TWC senior unsecured debt is to be secured on an equal and rateable basis with existing Charter secured debt.

--The expected cost synergies are reasonable in Fitch's opinion and achievement of the synergies does not carry a large degree of execution risk. Fitch notes that the combined company will continue to invest, and points to elevated risks related to the integration of operating systems.

LIQUIDITY

TWC generated approximately $1.2 billion of free cash flow (FCF, defined as cash flow from operations less capital expenditures and dividends) during the LTM period ended March 31, 2015. FCF production was pressured by higher capital expenditures as the company invested in its cable plant, and deployed new set-top boxes and modems supporting the company's TWC Maxx initiative.

TWC's liquidity position and overall financial flexibility are strong owing to Fitch's expectation that the company will continue to generate material amounts of FCF. Liquidity is further supported by cash on hand (which totaled $547 million as of March 31, 2015) and $2.8 billion of available borrowing capacity (as of March 31, 2015) from TWC's $3.5 billion revolver net of outstanding commercial paper and letters of credit. The commitments under TWC's $3.5 billion revolver will expire during April 2017.

TWC's debt maturity profile is well laddered and within Fitch's FCF expectation for the company. Outside of commercial paper, the next scheduled maturity is during 2017 when approximately $2 billion of debt is scheduled to mature.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Total consideration consists of $100 in cash and shares of Charter equivalent to 0.5409 shares of Charter for each TWC share outstanding.

--Pro forma leverage of 4.5x upon closing of the transaction.

--Capital structure will leave Charter and TWC's existing debt structures in place and that existing TWC senior unsecured notes will receive equal and rateable security interest in the assets of the combined entity.

RATING SENSITIVITIES

Given anticipated pro forma leverage of 4.5x for the combined entity, an affirmation of the current rating is not anticipated.

A downgrade of TWC's senior unsecured note rating may be limited to one notch provided that senior secured leverage is below 4x on a pro forma basis and consolidated leverage is below 4.8x

Fitch has placed the following ratings on Negative Watch:

Time Warner Cable, Inc.

--IDR 'BBB';

--Senior Unsecured debt 'BBB'.

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Time Warner Cable Enterprises LLC

--IDR 'BBB';

--Senior Unsecured debt 'BBB'.

Additional information is available on www.fitchratings.com

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985351

Endorsement Policy

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150526006243/en/

Fitch Ratings
Primary Analyst
David Peterson, +1-312-368-3177
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Culver, CFA, +1-312-368-3216
Senior Director
or
Committee Chairperson
Jack Kranefuss, +1-212-908-0791
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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