Fitch Downgrades Mediacom Communications' IDR To 'B'; Outlook Stable.

CHICAGO -- Fitch Ratings has downgraded the debt and Recovery Ratings (RRs) of Mediacom Communications Corporation (MCCC) and its wholly owned subsidiaries, Mediacom LLC and Mediacom Broadband LLC as follows:

MCCC

-- Issuer Default Rating (IDR) to 'B' from 'B+';

-- Senior convertible notes to 'CCC/RR6' from 'CCC+/RR6'.

Mediacom LLC

-- Issuer Default Rating (IDR) to 'B' from 'B+';

-- Senior unsecured debt 'CCC+/RR6' from 'B-/RR6';

-- Senior secured debt 'BB/RR1' from 'BB+/RR1'.

Mediacom Broadband LLC

-- Issuer Default Rating (IDR) to 'B' from 'B+';

-- Senior unsecured debt to 'B-/RR5' from 'B/RR5';

-- Senior secured debt to 'BB/RR1' from 'BB+/RR1'.

The Rating Outlook is Stable. Approximately $3.1 billion of debt as of the end of the first quarter of 2006 is affected by Fitch's rating action.

This action reflects MCCC's high leverage and the lack of debt reduction and improvement of its credit protection metrics in a meaningful manner. In Fitch's opinion the company's operating profile continues to lag behind its industry peer group (consisting primarily of Insight Communications Company and Cablevision Systems Corporation). On balance, Fitch's ratings also incorporate the company's strong liquidity position and upgraded cable plant, as well as the strong geographical clustering of the company's subscribers. The ratings are supported by the expected continuation of revenue and revenue generating unit (RGU) diversification through the deepening penetration of digital cable and high speed data services, as well as the introduction of voice over Internet protocol (VoIP) telephony service.

As of the end of the first quarter of 2006 MCCC's leverage (calculated as total debt to LTM EBITDA) was 7.48 times (x), reflecting a slight improvement from 7.55x at the end of 2005. MCCC's leverage has increased since the end of 2004 while coverage metrics have declined. Fitch attributes the erosion of the company's credit profile to competitive pressures brought on by direct broadcast satellite providers, MCCC's launch of its VoIP telephone service and the impact of hurricanes. These factors have resulted in stagnate EBITDA growth and elevated capital expenditures, which have contributed to MCCC's swing from generating free cash flow (2004 free cash flow generation of $43.2 million) to becoming a net user of cash during 2005 and the first quarter of 2006. Free cash flow is defined as cash from operations less capital expenditures and dividends. Increased capital expenditures are attributable to the continued acceptance of advanced digital services as capital expenditures continue to shift to success-based spending on customer premise equipment (CPE) and preparing the plant for telephone service launch. Fitch points out that the increase in success-based capital spending is positive for MCCC's credit profile and expects incremental revenue and cash flow growth over the medium term, provided that the company control subscriber churn. Fitch also notes that MCCC consolidated capital expenditures during the first quarter are 13.1% lower than the company's capital spending during the first quarter of 2005. Going forward, Fitch expects leverage to remain well above 7x (calculated on an LTM basis) during 2006 and to trend down to 7x by the end of 2007. Fitch anticipates that MCCC will be free cash flow negative during 2006 and free cash flow neutral during 2007.

Fitch recognizes the steps that MCCC has taken to mitigate competitive pressure and stabilize its subscriber base. In Fitch's opinion a key factor in stabilizing its subscriber base and increase overall revenue generating units (RGU) was the company's change in pricing strategy, which focused on product bundles and longer term pricing promotions. The strategy resulted in increased customer connect activity while reducing customer churn in all product categories. During the first quarter of 2006, MCCC added approximately 52,000 RGUs. This follows a significant rebound in RGU growth during 2005 when MCCC added 196,000 RGUs. However, while MCCC's subscriber metrics have improved the performance, from Fitch's view, they continue to lag behind its peer group.

MCCC's pricing strategy has yielded its intended results by stabilizing its subscriber base; however, in Fitch's opinion, the reliance on pricing promotions has proven to be detrimental to MCCC's ability to grow its revenues and EBITDA and expand operating margins. During 2006, subscribers will be rolling off the pricing promotions and MCCC will need to migrate these subscribers to standard rate plans, which in Fitch's opinion can expose MCCC to higher churn or lead to additional pricing incentives. However, Fitch does note that contrary to the trend during the first quarter of 2006, RGU and high speed data ARPU increased on a sequential basis for the first time in a year and a half.

Fitch believes the launch of telephony services certainly enhances MCCC's competitive positioning and clearly focuses the company's marketing efforts on service bundles. MCCC is offering the triple play for $99.95 a month and indicates that a substantial percentage of new telephony customers are taking the triple play offer. Additionally, Fitch anticipates that the launch of telephone service will help mitigate the increased risk of customer churn as subscribers roll off of pricing promotions.

From Fitch's perspective MCCC's liquidity position is strong and is supported by the available borrowing capacity on the bank facilities at Mediacom LLC and Mediacom Broadband LLC. Mediacom LLC and Mediacom Broadband have refinanced the term loans outstanding on their respective credit facilities. Mediacom LLC entered into a $650 million new term loan while Mediacom Broadband entered into a new $800 million term loan. The new term loans created approximately $400 million of incremental financing, which could be utilized to repay MCCC's 5.5% convertible notes due July 2006. In addition to providing the company with additional financing capacity, the new term loans extend final maturity dates and lower overall interest costs. MCCC's total available borrowing capacity pro forma for the two new term loans is approximately $1 billion as of the end of the first quarter.

The 'RR1' recovery rating assigned to Mediacom LLC and Mediacom Broadband LLC's senior secured credit facilities indicates superior recovery prospects, which are based on the asset coverage of these loans. The 'RR5' and 'RR6' recovery ratings assigned to the senior unsecured debt issued by Mediacom Broadband and Mediacom LLC, respectively, as well as the 'RR6' recovery rating assigned to MCCC's convertible notes are indicative of the diminished recovery prospects of bondholders at this level of the capital structure, driven by the large amount of senior secured debt ahead of these bonds in the capital structure.

The Stable Outlook incorporates Fitch's expectation that MCCC's operating metrics, including subscriber growth, ARPU, revenue and EBITDA growth, and operating margins will continue to improve during 2006. However, the Stable Outlook also incorporates Fitch's expectation that MCCC's operating metrics will continue to lag behind the cable MSO peer group. Fitch anticipates MCCC will encounter resistance from its subscriber base as the company migrates subscribers from promotional pricing. Fitch does expect the company to continue to grow ARPU at a pace that lags overall industry ARPU growth. Fitch expects that MCCC's EBITDA margins will be further pressured during 2006 as the company's marketing, customer care and retention spending increases, reflecting the company's efforts to further stabilize its subscriber base migration from promotional pricing and focus on the triple play service offering. Fitch notes that the company has approximately $51 million of remaining capacity under the board-authorized share repurchase program; the share repurchases thus far have been debt funded. Incorporated into the Stable Outlook is Fitch's expectation that the company will not become more aggressive with its share repurchase policy.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.