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Rating Action:

Moody's downgraded DISH Network's CFR and unsecured notes to B2; affirmed DISH DBS's B2 CFR, downgraded its unsecured notes to B3, and assigned a Ba3 rating to its new secured notes

08 Nov 2021

New York, November 08, 2021 -- Moody's Investors Service ("Moody's") downgraded DISH Network Corporation's ("DISH") corporate family rating (CFR) to B2 from B1, its senior unsecured notes to B2 from B1, and its probability of default (PDR) rating to B1-PD from Ba3-PD. Moody's also affirmed the B2 CFR of DISH DBS Corporation (a wholly-owned subsidiary of DISH Network "DBS"), downgraded its senior unsecured debt ratings to B3 from B2, and its PDR rating to B2-PD from B1-PD. Concurrently, Moody's assigned a Ba3 rating to DBS's proposed $4 billion of senior secured notes. DISH's speculative grade liquidity (SGL) rating is unchanged from SGL-2. The outlook is stable.

The downgrade of DISH's CFR and unsecured notes is due to our expectation that debt and leverage will increase at DISH (stand-alone) as a result of the transaction. The proceeds of the secured notes offering at DBS will be transferred to DISH via an intercompany loan. The intercompany loan will be secured by (i) the cash proceeds of the loan and (ii) an interest in any wireless spectrum licenses acquired using such proceeds. In certain cases, DISH wireless spectrum licenses (valued based upon a third-party valuation) may be substituted for the collateral. The intercompany loan will not be included as collateral for the DBS senior secured notes, and the notes will be subordinated to DBS's existing and certain future unsecured notes with respect to certain realizations under the intercompany loan and any collateral pledged as security for the intercompany loan. Such collateral may not be subject to additional encumbrances, other than certain permitted liens. If the proceeds from the collateral were to be insufficient to satisfy DISH's payment obligations under the intercompany loan, the amount of such deficiency would be an unsecured claim against DISH and pari passu with its existing unsecured notes. Current debt at DISH is about $6 billion and the intercompany loan would bring that to at least $10 billion. There is still significant capital needed for the build-out of DISH's planned wireless network, so the present cash balance of approximately $2.3 billion is unlikely to be used to reduce indebtedness.

The affirmation of DBS's CFR is due to the neutralizing effect of the intercompany loan on the impact from the new debt issuance. While the FCC prohibits security interests in FCC licenses, and some potential uncertainty exists as to the ability to perfect a security interest in the proceeds of a sale of FCC licenses, in our view the negative pledge against any other encumbrances of the collateral mitigates that potential deficiency. We anticipate that the intercompany loan terms will be structured to effectively mirror or exceed the cost of the new secured notes and link DBS more closely to DISH, but will fall far short of a full bilateral guarantee and consolidation of the two credits. The downgrade of the existing senior unsecured notes at DBS is caused by the issuance of the new secured notes, which will result in contractual subordination of the unsecured notes and potential disproportionate loss absorption relative to the new secured notes if a bankruptcy were to occur. However, we note that the unsecured notes will be contractually senior to the new secured notes with respect to certain realizations under the intercompany loan and any collateral pledged as security for the intercompany loan. The PDR of DBS was downgraded due to the existence of secured debt in the capital structure, which we believe will result in a higher probability of default and also higher recovery in default due to reduced flexibility to add more debt. We believe that the issuance of the DBS secured notes represents a change in financial policy regarding the use of secured debt, and therefore governance is a key factor in these rating actions.

Downgrades:

..Issuer: Dish Network Corporation

.... Corporate Family Rating, Downgraded to B2 from B1

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD5) from B1 (LGD5)

..Issuer: Dish DBS Corporation

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD5) from B2 (LGD4)

Affirmations:

..Issuer: Dish DBS Corporation

.... Corporate Family Rating, Affirmed B2

Assignments:

..Issuer: Dish DBS Corporation

....Senior Secured Regular Bond/Debenture, Assigned Ba3 (LGD3)

Outlook Actions:

..Issuer: Dish DBS Corporation

....Outlook, Remains Stable

..Issuer: Dish Network Corporation

....Outlook, Remains Stable

RATINGS RATIONALE

DISH's B2 CFR and DBS's B2 CFR reflect high pro forma gross debt-to-EBITDA consolidated leverage (around 5.0x at consolidated DISH) as of 9/30/2021 (incorporating Moody's standard adjustments) for a company that is facing strong secular headwinds (DBS) and significant startup and buildout costs (DISH). We anticipate that leverage will climb further without balance in capital raising. DISH's B2 CFR is supported by the substantial asset value derived from its vast wireless spectrum license holdings, although they are in process of being converted into operating assets which will need to generate revenues and eventually profits since it is unlikely at this point that these assets will be sold/monetized as financial assets. DISH's only subscribers are those acquired from Sprint and T-Mobile in mid-2020 and the revenue stream it gets from leasing certain satellite assets to DBS. DBS's B2 CFR reflects our concern that secular pressure from changing television consumption habits to SVOD services like Netflix, Inc. (Ba1 positive) and other emerging direct-to-consumer platforms, will continue to result in increasing cord-cutting of traditional linear bundled pay TV services in the US, and we do not expect SLING TV, the company's over-the-top pay TV business to grow sufficiently to mitigate the DBS subscriber losses. However, declining pay TV penetration levels, particularly for smaller cable companies, will likely result in elimination of pay TV service offerings by these companies when they become unprofitable, and direct broadcast satellite-distributed traditional linear pay TV providers could be the beneficiaries in future years as they increasingly become the providers of last resort, which may effectively elongate the revenue tail for DBS. This would also likely give companies like DBS more leverage against rising affiliate fees by networks. DBS bondholders have no legal recourse to DISH or its wireless spectrum licenses other than any wireless spectrum licenses pledged as collateral for the intercompany loan, and have limited protection against the upstreaming of cash to DISH, although the intercompany loan restricts DBS from using any proceeds from prepayment of the loan to directly make cash dividends or distributions to DISH prior to repayment in full of the intercompany loan.

The rating also considers the company's controlling shareholder structure. The controlling shareholder and Chairman, Charles Ergen, has demonstrated willingness to be highly acquisitive, and to use significant amount of debt and leverage to fund much of the financing costs. In addition, limited transparency on fiscal policies, extremely limited financial guidance from the company's management, and flexible indenture covenants also moderately constrain the CFR.

As of September 30, 2021, DISH and DBS had combined about $2.3 billion of cash and cash equivalents and about $3.0 billion of marketable securities. The company has no revolving bank facility, but we believe that the company has significant alternate liquidity potential with debt capacity at DISH, given only $6 billion of debt outstanding (excluding the intercompany loan), which is far less than the perceived value of the spectrum license assets it has accumulated over the years. DISH did not acquire a substantial amount of wireless spectrum licenses in the C-Band auction that concluded in February 2021 in the U.S., but we anticipate that the company may be active in the current auction, may pursue other wireless spectrum license transactions and has a standing option to acquire $3 billion of wireless spectrum licenses from T-Mobile. DISH's need for additional capital to fund the build-out of its wireless network was largely expected. However, further increases in debt without additional equity capital raising would increase financial risks at a time when DISH is still in its developmental IOT network buildout stage and while DBS is unlikely to see secular pressures recede in its pay TV business, and could therefore further impact the company's credit ratings.

The stable outlook reflects our expectation that the company has adequate liquidity for DISH and DBS for the next 12 to 18 months to fund 5G build-out costs over that period and fund DBS's $2 billion unsecured notes maturity in July 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the capital needs and the start-up nature of the 5G build-out at DISH and the debt maturities and secular pressures at DBS, a rating upgrade for either company is unlikely. An upgrade could occur if: 1) material equity capital is raised from a strategic investor, such that little or no additional debt is likely to be needed by DISH to complete the company's IOT vision; and 2) DBS can manage its maturities in 2022 and beyond with senior unsecured debt rather than secured debt, and demonstrates that it can pace the secular pressure with continuing ability to reduce debt and leverage.

We recognize that DISH is transitioning from an asset holding company (excluding DBS) to a wireless broadband company. That means that it faces significant costs to build out its network, and then to market it before it will achieve enough customers to generate profits. Thus, the ratings will tolerate some temporary escalation in leverage during this period. Ratings may be downgraded further if DISH engages in more pure debt-financed acquisitions and spectrum license purchases or debt-only financed build-out of the network and start-up costs such that consolidated leverage is sustained over 6.0x (including Moody's adjustments) after the company reaches the requisite FCC-mandated build-out coverage requirements. For DBS, ratings could face a downgrade if leverage is sustained above 4.0x after 2022, if subscriber losses decline at a faster pace than historical trends, or if liquidity becomes constrained.

DBS is a wholly owned subsidiary of DISH and is a direct broadcast satellite pay-TV provider, as well as an internet pay-TV provider through its SLING TV business, with a total of approximately 11.0 million subscribers as of September 30, 2021. DBS's revenue for LTM September 30, 2021 was $12.8 billion. DISH also operates a wireless business segment, making the company the fourth U.S. national carrier. DISH's wireless segment operates in two business units, Retail Wireless and 5G Network Deployment. DISH's revenue for LTM September 30, 2021 was roughly $18.0 billion on a consolidated basis.

The principal methodology used in these ratings was Pay TV published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287901. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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