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Fitch Rates Charter's Sr. Secured Notes 'BBB-'/'RR1'; Outlook Stable.

New York: Fitch Ratings has assigned a 'BBB-'/'RR1' rating to Charter Communications Operating, LLC's (CCO) proposed benchmark-sized issuance of senior secured notes. CCO is an indirect, wholly owned subsidiary of Charter Communications, Inc. (Charter). CCO's Long-Term Issuer Default Rating (IDR) is currently 'BB+'/Stable Outlook.

The company is expected to use net proceeds from the offering for general corporate purposes, including potential buybacks of Class A common stock of Charter or common units of Charter Communications Holdings, LLC (CCH), a subsidiary of Charter.

KEY RATING DRIVERS

M&A Activity Credit Positive: In May 2016, Charter completed its merger with Time Warner Cable, Inc. (TWC) and acquisition of Bright House Networks (collectively, the transactions). Fitch continues to view the transactions positively and believes they strengthen Charter's overall credit profile. Fitch estimates total Fitch-calculated gross leverage was 4.5x, while secured leverage was 3.3x for the last-12-months ended March 31, 2018, pro forma for prior recent debt issuance.

Integration Key to Success: Charter's ability to continue managing the simultaneous integration of the transactions and limit disruption to its overall operations is critical. Charter is also managing the transition to all-digital services and the introduction of its interactive IP-based video user interface across the TWC and Bright House systems. Similar efforts in their legacy systems boosted ARPU and accelerated growth in revenue, EBITDA margin and free cash flow (FCF).

Credit Profile: Charter served 27.5 million customer relationships as of March 31, 2018 and is the country's second-largest cable multiple-system operator. Fitch-calculated LTM revenue and EBITDA totalled approximately $42.1 billion and $15.5 billion, respectively.

Improving Operating Momentum: Charter's operating strategies are positively affecting its operating profile, resulting in a strengthened competitive position. The market-share-driven strategy focusing on enhancing the overall competitiveness of Charter's video service and leveraging its all-digital infrastructure is improving subscriber metrics, growing revenue and ARPU, and stabilizing operating margins.

Debt Capacity Growth: Charter maintains a target net leverage range of 4.0x to 4.5x and up to 3.5x senior secured leverage. Fitch expects Charter to continue creating additional debt capacity and remain within its target leverage, primarily through EBITDA growth. Proceeds from prospective debt issuances under additional debt capacity created are expected to be used for investment in the business, accretive acquisitions and shareholder returns. Fitch does not expect Charter to maintain significant cash balances, resulting in total gross leverage roughly equating to total net leverage over the rating horizon.

DERIVATION SUMMARY

Charter is well positioned in the multichannel video programming distributor (MVPD) space given its size and geographic diversity. With 27.5 million customer relationships, Charter is the third largest U.S. MVPD after AT&T Inc. (AT&T), through its DirecTV and U-verse offerings, and Comcast Corporation (Comcast). Both AT&T (A-/Negative Watch) and Comcast (A-/Stable) are rated higher than Charter due primarily to their lower target and actual total leverage levels and significantly greater revenue size, coverage area and segment diversification. Conversely, Charter is rated higher than smaller MVPDs such as Cablevision (B+/Stable) given its lower leverage and significantly larger revenue size and coverage area.

Charter is in the process of realizing up to $1 billion of revenue and expense synergies from the transactions, which will improve EBITDA margins. However, ratings should be held in check as the company expects to continue issuing debt under additional debt capacity created by EBITDA improvement while remaining within its target leverage range of 4.0x to 4.5x.

Proceeds from prospective debt issuances under this additional debt capacity are expected to be used for investment in the business, accretive acquisitions and shareholder returns. No country-ceiling, parent/subsidiary aspects impacts the rating.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

Revenue: Revenues are projected to grow mid-single digits over the rating horizon driven by an improvement in overall customer relationships and mid-single digit ARPU growth. Fitch expects continued low single digit declines in video customers as the industry struggles to offset the increasingly competitive environment. However, HSD customer growth at 5% to 7% annually should more than offset these losses, with HSD total revenues surpassing video total revenues for the first time in 2019. Although telephone customers continue growing at low single digits, telephone total revenues fall due to declining telephone ARPU.

EBITDA Margin: Improves more than 250 bps through 2020 as Charter benefits from revenue growth and realizes the significant integration opportunities from the transactions. Fitch expects Charter to realize the full $1 billion of run rate integration synergies by 2020.

Capex: Expected to remain at approximately 18% of revenues due to integration of the transactions and product development investments, including investments related to the company's planned wireless offering.

FCF: Fitch expects Charter to generate $4 billion to $4.5 billion of annual FCF over the investment horizon.

Debt Issuance: Fitch expects Charter to issue debt annually to fund annual maturities and to take advantage of additional debt capacity created by EBITDA improvement. Proceeds from prospective debt issuances under this additional debt capacity are expected to be used for investment in the business, accretive acquisitions and shareholder returns. Fitch expects Charter to create annual debt capacity of more than $4 billion to $5.5 billion annually and still remain within its target net leverage of 4.0x to 4.5x given the expected EBITDA improvement.

Capital Allocation: Fitch expects Charter to use cash on hand, FCF and additional debt capacity created by EBITDA improvement for accretive acquisitions and shareholder returns. Fitch does not include any acquisitions over the investment horizon and annual shareholder returns are expected to increase to $10.5 billion by 2020. Fitch does not expect Charter to maintain significant cash balances resulting in total gross leverage roughly equating to total net leverage over the rating horizon.

RATING SENSITIVITIES

Developments that may, individually or collectively, lead to positive rating action:

--Integrating the transactions while limiting disruption in the company's overall operations, and demonstrating continued progress in closing gaps relative to its industry peers in service penetration rates and strategic bandwidth initiatives;.

-- A strengthening operating profile as the company captures sustainable revenue and cash flow growth, and the reduction and maintenance of total leverage below 4.0x could also lead to positive action.

Developments that may, individually or collectively, lead to negative rating action:

--Leveraging transaction or adoption of a more aggressive financial strategy that increases leverage beyond 5.5x in the absence of a credible deleveraging plan;

--Perceived weakening of its competitive position; or failure of the current operating strategy to produce sustainable revenue, cash flow growth and strengthening operating margins.

LIQUIDITY

Fitch regards Charter's liquidity position and overall financial flexibility as satisfactory given the rating. Charter's financial flexibility will improve in step with the continued growth in FCF generation. Charter generated $2.5 billion of FCF during the LTM ended March 31, 2018. The company's liquidity position at March 31, 2018 was comprised of $576 million of cash and was supported by $2.8 billion of borrowing capacity from its $4 billion revolver, which expires in March 2023, and anticipated FCF generation. Charter has a manageable maturity schedule over the next three years, with $156 million due in 2018, $3.5 billion in 2019 and $3.7 billion in 2020.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Sep 25, 2018
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