Fitch Rates DISH's Senior Unsecured Offering 'BB-/RR4'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BB-/RR4' issue rating to DISH DBS Corporation's (DDBS) issuance of approximately $750 million of senior unsecured notes. DDBS is a wholly owned subsidiary of DISH Network Corporation (DISH; Fitch Issuer Default Rating of 'BB-'). Proceeds are expected to be used for strategic transactions, including spectrum-related transactions that will support the company's unspecified wireless strategy. The Rating Outlook is Stable. Pro forma for the issuance, DISH had approximately $12.9 billion of senior unsecured notes outstanding as of March 31, 2016.

As of first quarter 2016, Fitch believes DISH has adequate room in the current rating to accommodate a reasonable amount of incremental debt related to potential TV Broadcast Spectrum Incentive auction spending if needed. Fitch will treat this contingent liability as event risk in the rating, and will evaluate DISH's capacity to fund any potential liability with cash in excess of liquidity needs, if necessary, at the time the payment comes due.

Pro forma for the proposed offering, total debt outstanding was approximately $13 billion as of March 31, 2016. DISH's pro forma leverage was 4.3x for the latest 12 month (LTM) period ended March 31, 2016, a decrease from 4.6x and 4.9x at year-end 2015 and March 31, 2015, respectively. DISH's leverage reduction provides adequate flexibility to support a reasonable amount of incremental debt within our 5x leverage threshold established for the current rating associated with the TV Broadcast Spectrum Incentive auction if needed.

KEY RATING DRIVERS

Wireless Strategy Poses Event Risk: The current ratings take into consideration the lack of visibility into DISH's wireless strategy, and the potential capital requirements and execution risk associated with that strategy. Fitch acknowledges the significant asset value and strategic optionality associated with DISH's investment in wireless spectrum. However, in Fitch's view, DISH would need to meaningfully differentiate its wireless services in order for the strategy to successfully diversify its revenues, and to provide for potential cash flow growth. A 4G LTE deployment similar to other wireless operators' services would likely struggle to gain traction, given the maturing wireless market and entrenched national operators. Fitch notes that the terms of its wireless spectrum assets require the company to build out a portion of the spectrum coverage area, which can pressure the company's credit profile.

DISH's efforts to transform though various wireless initiatives remain in a development stage. The company's strategy has experienced numerous set-backs as the company endeavors to engage another wireless carrier seeking a partnership, acquisition or network-sharing agreement. Event risks remain elevated as the company contemplates additional acquisitions of spectrum or assets to support the wireless strategy. The strategic importance of a wireless broadband service option has not diminished and, as such, Fitch expects DISH will likely continue its efforts to engage an existing national wireless service provider.

Ratings Reflect Weak Trends: Fitch believes the company's overall credit profile has limited capacity to accommodate DISH's inconsistent operating performance as the company struggles to transform its branding strategy from a value-oriented service provider to a technology focused provider targeting high-value subscribers. While subscriber metrics remain weak, average revenue per user (ARPU) increased 2.6% during the first three months of 2016 versus the prior period as a result of programming cost increases. However, ARPU growth has slowed versus 4.4% during the first three months of 2015 as DISH's pay-tv programming package mix changes to accommodate an increase in Sling TV subscribers.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for DISH include nominal overall revenue growth generated by slower subscriber and ARPU growth. EBITDA margins in 2016 and 2017 are expected to remain flat from the 19.8% recorded in 2015, assuming that higher programming costs are offset somewhat by SG&A cost containment efforts.

RATING SENSITIVITIES

Although Fitch believes it is unlikely over the near term, a positive rating action will likely coincide with the company articulating a wireless strategy that is executed in a credit-neutral manner and committing to a leverage target below 4x.

Fitch believes a negative rating action will likely coincide with the company's decision to execute a wireless strategy, or other discretionary management decisions that weaken its ability to generate free cash flow (FCF), maintain adequate liquidity to meet ongoing operational needs, erode operating margins, and increase leverage higher than 5x without a clear strategy to deleverage the company's balance sheet. Additional scenarios that may have a potential rating impact, including the TV Broadcast Spectrum Incentive auction, will be evaluated as they are disclosed.

LIQUIDITY

The company's current liquidity position is adequate for its ongoing operations. Overall, the company's liquidity position and financial flexibility is supported by expected FCF generation. The company also benefits from a reasonable maturity schedule, as 38% of the company's outstanding debt is scheduled to mature through 2020 but no more than approximately 10% in any one year. The next maturity is in 2017 when $900 million comes due.

DISH had a total of approximately $871 million of cash and marketable securities (current portion) as of March 31, 2016. The majority of DISH's consolidated cash and marketable securities balances were held at DISH. The company's stated minimum cash requirement of $1 billion and FCF generation mitigate the risk caused by the lack of a revolving credit facility.

DISH's FCF (defined as cash flow from continuing operations less capital expenditures and dividends) declined approximately 16% as of the LTM period ended March 31, 2016 to $1.2 billion when compared to the same period during 2015. DISH's capital intensity remained relatively stable in the 7% to 8% range in 2015. Capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment, and include capitalized interest related to FCC authorizations.

Date of Relevant Rating Committee: Oct. 2, 2015.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--No material adjustments have been made that have not been disclosed in public filings of this issuer.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005779

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160608006530/en/

Fitch Ratings
Primary Analyst
Constance McKay, +1-312-368-3148
Associate 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
Bill Densmore, +1-312-368-3125
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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