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Rating Action:

Moody's downgrades DISH Network's CFR to B1 and DISH DBS's CFR to B2; assigns B2 to new DISH DBS senior unsecured notes

24 Jun 2020

New York, June 24, 2020 -- Moody's Investors Service ("Moody's") downgraded DISH Network Corporation's ("DISH") corporate family rating (CFR) to B1 from Ba3, probability of default (PDR) rating to Ba3-PD from Ba2-PD and senior unsecured debt ratings to B1 from Ba3. Moody's also downgraded DISH DBS Corporation's, a wholly-owned subsidiary of DISH Network, ("DBS") CFR to B2 from B1, PDR rating to B1-PD from Ba3-PD, senior unsecured debt ratings to B2 from B1 and assigned a B2 rating to DBS's proposed new $1 billion of senior unsecured notes. DISH's speculative grade liquidity (SGL) rating is unchanged from SGL-2. The actions conclude the review initiated on July 29, 2019 prompted by DISH's and DISH DBS's already limited financial capacity for higher debt and leverage for their present credit ratings and an agreement reached by DISH, the Department of Justice (DOJ), T-Mobile USA, Inc. (T-Mobile, Ba2 CFR) and Sprint Corporation to acquire Sprint's prepaid wireless service businesses and wireless spectrum assets. The outlook is stable.

A summary of today's action follows:

Assignments:

..Issuer: Dish DBS Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned B2 (LGD4)

Downgrades:

..Issuer: Dish DBS Corporation

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

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

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4) from B1 (LGD4)

..Issuer: Dish Network Corporation

.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD

.... Corporate Family Rating (Local Currency), Downgraded to B1 from Ba3

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to B1 (LGD5) from Ba3 (LGD5)

Outlook Actions:

..Issuer: Dish DBS Corporation

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Dish Network Corporation

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

The downgrade of DISH's and DBS's ratings is due to the overall need for capital to refinance and repay DBS debt and deleverage the company as its revenues shrink due to secular industry pressure. It reflects uncertainty surrounding raising capital to fund the build out and startup costs of the company's planned state of the art US wireless Internet of Things (IoT) broadband network. We believe that there is increased risk burdened by bondholders as DISH continues with its plan to build out a state of the art 5G IoT broadband network until it secures a material equity investment and/or partner. We also believe risk is rising due to the continuing secular decline of DBS's pay-TV subscriber base. Our expectations are for worsening operating performance at DBS that may outpace debt reduction, as well as thinning liquidity for the consolidated company since the company does not have a revolving credit facility. We believe that both DISH and DBS are dependent upon accommodating capital markets. We expect leverage to increase at the DBS level, in spite of the recent debt repayment in excess of $1 billion, as we expect EBITDA to decline in the mid-to-high single digit percentage range over the next 12-18 months.

Over the years, DISH has spent more than $21 billion to acquire a significant amount of wireless spectrum, and has options to acquire more spectrum. The company has acquired its spectrum mostly using cash flows generated from DBS and leveraging DBS's balance sheet over the years. The company has estimated that it will need $10 billion to complete the national build 5G out of its state of the art 5G network. This has been a great source of debate as it pales in comparison to even maintenance spending by existing US wireless companies. While we appreciate the materially lower costs associated with the significant efficiencies of a modern wireless network which uses the cloud to virtualize the network and constructing a network without the need to maintain consistent service to a large subscriber base at the same time, we are concerned and biased towards a potentially unexpected and materially higher cost to complete the build out, particularly as we adjust debt for leases and include vender financing. A weakness for DBS bondholders is the fact that they have no recourse to DISH and its spectrum and other assets. We believe the deterioration of the DBS business will provide limited if any capacity for DISH to continue funding its 5G build out strategy using DBS's cash flows and balance sheet (beyond the intercompany leasing of satellites and equipment that DISH acquired from Echostar in 2019) due to the larger DBS debt maturities over the next two years.

Despite the pressure, DBS still generates roughly $1 billion of free cash flow annually, but cash flow, along with revenue and EBITDA, have been steadily declining since 2016. While DBS management has done a good job at containing subscriber losses, particularly compared to its closest peer DIRECTV (owned by Baa2-rated AT&T), and has been paying down debt and deleveraging from its highs, the underlying subscriber numbers point to a steady secular decline in linear video revenues. We believe that the company's satellite pay-TV segment will continue to generate solid free cash flows through the medium-term. The trajectory of the tail of cash flows beyond that is unpredictable due to the rapidly changing television ecosystem and consumption habits verses the counter moves to contain programming and operating costs. In addition, the quarter ending March 31, 2020 marked the first time DBS's 'Sling TV', the industry's first over-the-top (OTT) internet-delivered video service, experienced a decline in subscribers quarter-over-quarter (as well as year-over-year). Sling's business model is an ad-based model, but we believe that it can only prove successful if it can reach scale which in our view will prove challenging without an industry shake out of some of Sling's virtual MVPD competitors. Over the longer term, Sling faces the same pressures that the satellite pay TV business faces unless network affiliate costs are contained or it can go full network a-la-carte. We believe management will continue managing costs aggressively at DBS and harvest cash flows for the foreseeable future to repay maturing debt. We forecast leverage at the DBS level (excluding DISH Network's $4 billion of convertible debt) will remain above 4.0x over the next 18-24 months, as debt repayment will not be enough to keep up with EBITDA declines.

DISH and DBS have repaid DBS debt maturities as they came due (rather than refinancing them at DBS). However, we do not expect DBS to generate enough cash or have enough cash on hand to meet its $2 billion principal payment each in June 2021 and July 2022. Therefore, we believe the company will need to access the capital markets to refinance a portion of the amount which exceeds free cashflow. We estimate the company will need to refinance approximately half of each of those maturities. We believe that the newly proposed $1 billion of notes and free cashflow over the next year will be sufficient to repay the 2021 maturity. The company has many options to refinance the shortfall in cash for the 2022 maturity, including issuing debt at the DISH parent level as they have proven they will do before, issuing additional pari passu unsecured debt at DBS if the market will facilitate that, but if not, it is our view that there is a distinct and growing possibility that DBS may need to issue secured debt at the DBS level for the first time, which would prime the unsecured bonds and could start putting negative pressure on the unsecured debt ratings. New secured debt would subordinate the existing senior unsecured DBS bond holders (currently about $9.5 billion outstanding) which could eventually have a negative impact on the credit ratings of those notes even apart from any potential action taken on the CFR.

Moody's believes that DISH was in a strong bargaining position in the negotiations between T-Mobile and the US Department of Justice and therefore has gotten very good value in the terms of its acquisition. However, we believe that DBS's cash flows will be earmarked for DBS debt repayment for the foreseeable future, and will not be a material source of capital for DISH over the next several years for its wireless IoT network buildout plans. Sourcing needed capital is the primary near to medium term uncertainty and risk when assessing the future credit risk, particularly if new capital funding sources rely on raising additional debt. We have noted for some time that the absence of a well-capitalized equity investor or partner could put pressure on credit ratings by 2020, given the 2021 and 2022 maturities and government mandated spectrum build out schedule. Notwithstanding that uncertainty, we believe that the deal with T-Mobile, which provides access to its wireless network through a seven-year MVNO arrangement as well as an agreement with the Federal Communications Commission for a more flexible build out, is a material strategic benefit for DISH's plan and will provide an elegant solution for tackling the build out path and provide flexibility to relieve pressure points in building an organic network. This tempers the more significant negative pressure on DISH's credit profile for now. We expect the acquisition of Sprint's 9 million prepaid Boost customers and the right to acquire other potentially decommissioned assets to close along with the MVNO deal soon. The subscribers acquired are less material to the credit as these subscribers typically have higher churn rates and the subscriber base is unlikely to impact results materially over the near term. The acquisition is expected to be funded with $1.4 billion of cash on hand, $1 billion of which was raised from an equity offering. As of 3/31/20 Dish had $3.38 billion of cash and marketable securities. In the absence of an equity investor or partner, DISH will need to be creative in order to continue funding and completing the build out of its wireless 5G network. If the company's share price is unattractively valued, raising equity through a secondary offering or convertible debt is less likely in our view, and issuing debt at the DISH level is more likely. Since the assets at DISH generate minimal cash flows relative to the capital needed for the buildout, debt raised at the DISH level (as well as the existing $4 billion) would will need to be serviced by the DISH capital raise or DBS cashflows until the wireless network is operational and generating free cash flow in the distant future.

Additionally, the effort and journey to create a competitive fourth mobile carrier will be expensive and a laborious startup business, though over the long-term we believe that DISH is targeting wholesale and commercial 5G applications rather than targeting significant direct consumer opportunities, so we believe there are likely stronger competitive opportunities particularly from a commercial aspect. While we believe it will be a huge strategic and operationally undertaking for the company, the company has a successful entrepreneurial track record of building its pay TV from scratch. Also, we believe that the company acquired its spectrum assets at attractive purchase prices and has the capacity to raise some additional capital against the spectrum value ($4 billion of convertible debt currently resides at DISH Network) at DISH Network where consolidated leverage stood at 5.5x (with Moody's standard adjustments) as of March 31, 2020.

Additional contingent overhang on the credit lies in two other matters: 1) the option to acquire additional 800 Mhz spectrum from T-Mobile for $3.6 billion in three years or forfeit a $72 million penalty or option fee; and 2) the approximately $3.2 billion from the yet to be settled dispute with the FCC over the AWS auction disallowed DISH discount, which as it stands today, exposes DISH to the difference between $3.2 billion and the amount of the high bid (if lower than $3.2 billion) from a re-auction of that spectrum. We believe that the dispute could potentially work out more favorably for DISH, such as handing the spectrum back to DISH as well as the approximate $500 million of penalties paid to the FCC related to the dispute.

The stable outlook for DISH reflects our comfort that the proposed notes issuance at DBS will provide adequate liquidity for DBS for the next 12 to 18 months until the 2022 maturity. However, we still have concerns that DISH will issue debt or debt-like securities in the absence of a new equity investor to finance the wireless 5g startup. We also have medium-term concerns regarding the narrowing of flexibility and options to monetize the spectrum to a build out rather than a potential sale, with the deal with the DOJ limiting outright sales of the company's spectrum assets since the intent was for DISH to become the nation's fourth national competitor. DISH's SGL-2 rating reflects the significant cash use events expected to occur in the next 12 months. While cash & cash equivalents on balance sheet as of March 31, 2020 totaled $3.38 billion, we view pro forma cash of around $800 million after taking into account the Boost acquisition of $1.4 billion and May 2020 DBS debt repayment of $1.1 billion. With the $1 billion debt issued from the current proposed notes offering proceeds and our expectation for DBS to generate at least $900 million of FCF in 2020 and around $450 million in the first six months of 2021, there will a a total of $3.15 billion when you include pro forma starting cash. We anticipate DISH to spend up to $1 billion or more for the 5G build out through June 2021, leaving around $2.15 billion plus some moderate cash flow at DISH which be expect will be sufficient to meet DBS's $2 billion bond maturing in June 2021. The company has no revolver in place, but we believe that the company has significant alternate liquidity potential with debt capacity at DISH Network, given the $4 billion of debt outstanding which is far less than the perceived value of the spectrum assets it has accumulated over the years.

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

Given the capital needs of the company, secular pressures and start up nature of the 5G build out, a rating upgrade 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 to complete the company's IoT vision; and 2) the company repays DBS's 2021 maturity and 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.

Ratings may be downgraded further if DISH Network engages in further acquisitions and spectrum purchases with debt or cash on hand such that consolidated leverage is sustained over 6.0x (including Moody's adjustments) and there is no definitive agreement with a large, financially strong, strategic partner to fund its wireless build. For DBS, its senior unsecured ratings could be downgraded further if unsecured debt is refinanced with secured debt, or all its ratings could face a downgrade if leverage is sustained above 4.5x beyond 2021, subscriber losses decline at a faster pace than historical trends, or liquidity becomes constrained even further.

The principal methodology used in these ratings was Pay TV published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1134554. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

DISH DBS Corporation ("DBS") is a wholly owned subsidiary of DISH Network Corporation ("DISH") and is a direct broadcast satellite (DBS) pay-TV provider and internet pay-TV provider via its SLING TV operation, with about 11.3 million subscribers as of 3/31/2020. Revenue for LTM March 31, 2020 was $12.8 billion, down from $13.6 billion for fiscal year 2018. Pro forma revenue for the Boost acquisition is approximately $15.5 billion.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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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