Fitch Affirms Echostar's IDR at 'BB-'; Conv Sub Notes at 'B'; Outlook Stable.
Fitch's affirmation reflects the operating leverage derived from Echostar's size and scale as the fourth largest multichannel video programming distributor in the United States; the company's solid liquidity position, and expectation for continued free cash flow generation.
Fitch's ratings also incorporate Echostar's weak competitive position and limited ability to respond to the changing and more competitive operating environment. From Fitch's perspective competitive pressures within the multi-channel video distribution market have increased due to the wide spread availability of the triple play service offering and the introduction of video services by the regional bell operating companies, namely Verizon and AT&T. Fitch believes that demand for Echostar's video service will remain strong within certain segments of the multi channel video distribution market. However, the evolving competitive landscape will materially increase the business risks related to Echostar's credit profile. Outside Echostar's core market segments the company will find it increasingly difficult to protect and grow its market share in the face of the bundled service offerings by the cable MSOs and telephone companies in residential markets.
A key to Echostar's continued EBITDA growth and free cash flow generation will be how the company balances subscriber growth, ARPU, subscriber churn and subscriber acquisition costs. Fitch believes that a more competitive multi-channel video distribution market can lead to higher subscriber churn rates subscriber acquisition costs, and pressure on the company's ARPU. These factors can limit EBITDA growth and constrain operating margins. During the third quarter of 2006 Echostar's subscriber acquisition cost (SAC) was $688 per gross addition. Fitch believes that competitive pressures can push Echostar's SAC in excess of $700 during 2007.
Echostar's competitive position is hurt by its lack of a broadband solution. Currently, the company's broadband strategy is centered on its ability to bundle DSL service through AT&T and other incumbent local exchange providers. Fitch believes that for competitive purposes an investment in a broadband network is appropriate. However, the capital costs associated with a high speed data network will be significant and would certainly pressure Echostar's credit profile if the company elects to deploy the network without using partners to mitigate financial and technical risks. Over the near term Fitch believes Echostar will compete for video subscribers by aggressively deploying high definition programming. Echostar does have a leading position among multi-channel video distributors with 30 national HD channels. However Echostar is lagging behind most cable MSOs by only providing local channel HD programming in only 26 cities. Moreover, Echostar's HD lineup does not include any of the regional sports networks.
The company's leverage metric, calculated on a latest 12 month (LTM) basis, as of September 30, 2006 was 3.04 times (x) on a consolidated basis and 2.4x at EDBS. Absent a material investment in a broadband network, Fitch expects that Echostar's credit protection metrics will continue to improve during 2007 with leverage improving a half turn from the Sept. 30, 2006 level and free cash flow as a percentage of total debt in excess of 8%. Since the end of the third quarter the company has made substantial progress in addressing its 2008 scheduled maturities, which as of the end of the third quarter totaled $2.5 billion. During October, the company issued $500 million of senior notes due 2013 and used the proceeds thereof to redeem its floating rate senior notes due 2008. Additionally on Jan. 17, 2007, the company announced that it will redeem all of its outstanding 5.75% convertible subordinated notes due 2008 on February 15, 2007. The redemption will initially be funded with cash on hand. Echostar's liquidity position is strong and is primarily supported by approximately $2.8 billion of restricted and unrestricted cash, and marketable investment securities on its balance sheet as of Sept. 30, 2006 and free cash flow expectations.
Fitch's Stable Rating Outlook reflects the consistent subscriber economic trends as well as the positive EBITDA and free cash flow prospects expected over the near term balanced with the very competitive operating environment. Outside of the announced share repurchase authorization Fitch views the use of cash for shareholder friendly actions as an erosion of financial flexibility that could result in pressure on the ratings or an outlook revision. Additionally, Fitch has concerns related to the uncertainty surrounding the company's broadband strategy and the potential cash requirements to launch a wireless broadband service. Lastly, incorporated into the current ratings and Stable Rating Outlook is the expectation that the ongoing litigation related to Tivo, Inc. is resolved in a credit neutral manner and without significant operational disruption.
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|Date:||Jan 25, 2007|
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