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Announcement:

Moody's says Charter's Ba2 CFR is unchanged with add-ons to 2030 and 2050 notes

02 Dec 2019

New York, December 02, 2019 -- Moody's Investors Service ("Moody's") says Charter Communications, Inc.'s ("Charter" or "the Company") Ba2 Corporate Family Rating, and all instrument ratings, are unaffected by the add-on's to the 4.8% senior secured notes (maturing 2050) outstanding at Charter Communications Operating, LLC (CCO) and 4.75% senior unsecured notes (maturing in 2030), outstanding at CCO Holdings, LLC (CCO Holdings). The add-ons have the same terms and conditions as the existing notes. The outlook is unchanged at stable.

Moody's views the transaction as credit neutral. While the transaction, holding all else constant, is likely to initially lift the leverage ratio by approximately .1x, Moody's expects the proceeds from the note offerings will be used repay future maturities over the next 12 months, with the funds temporarily held in cash until then. Any incremental leverage (net of repayment) will be balanced with additional liquidity. Despite the higher temporary leverage, we project the ratio to fall comfortably inside our tolerances over the next 12-18 months assuming no further leveraging events. Additionally, we don't expect the transaction to materially change the proportional mix of secured and unsecured debt, or the resultant creditor claim priorities in the capital structure.

Charter's credit profile is supported by the Company's substantial scale and share of the US market which is protected by a superior, high-speed network. Charter is the second largest cable company in the United States, serving over 29 million customers across 41 states. It provides video, data, voice, and mobile wireless services, which produce over $45 billion in revenue principally from 50 million primary service units (PSU's). Broadband demand drives growth and profitability, providing an operating hedge to weakness in video and voice services while solid free cash flows support good financial flexibility. The credit profile is constrained by a financial policy that tolerates high absolute debt levels and elevated financial leverage. Charter's financial policy remains a key driver of the credit profile as management has stated that it would like to keep management calculated net debt-to-EBITDA in the 4.0-4.5x range. Charter is also challenged by declining voice and video services which is experiencing secular decline from intense competition. Lower video penetration is likely to continue for the foreseeable future. Charter has also just begun offering mobile wireless services through its MVNO with Verizon Communications Inc., making it a true quad-player. While we anticipate this service to add scale, diversify revenues, increase subscribers and help reduce churn / increase retention, we also expect wireless start-up costs to be a burden on profits and cash flows with steady-state economics that are less favorable than the existing cable model.

The SGL-2 liquidity rating reflects good liquidity with positive free cash flow, a largely undrawn $4.75 billion revolver facility, and only incurrence-based financial covenants. Alternate liquidity is constrained with a largely secured capital structure.

The senior secured credit facilities and senior secured notes at Charter Communications Operating, LLC, Time Warner Cable LLC, and Time Warner Cable Enterprises LLC are rated Ba1 (LGD3), one notch above the Ba2 CFR. Secured lenders benefit from junior capital provided by the senior unsecured bonds at CCO Holdings, Inc. The senior unsecured notes at CCO Holdings, Inc. are the most junior claims and are rated B1 (LGD5), and are subordinated to the secured obligations of its subsidiaries. Our instrument ratings reflect the Ba2-PDR (Probability of Default Rating) with a balanced mix of secured and unsecured credit, which we expect will result in an average rate of recovery (of approximately 50%) in a distressed scenario. Estimated lease rejection claims and trade payables are unrated, and do not affect the instrument level ratings given their insignificance to the total quantum of obligations. In an actual default scenario, the instrument-level ratings could change based on the potential outcomes (e.g. bankruptcy versus liquidation) and a detailed analysis of valuation relative to claim-by-claim asset coverage and recoveries.

The stable outlook reflects our expectation that debt, revenues, and EBITDA will be about $76 billion, $48 billion, and $17 billion, respectively by the end of 2020. We project EBITDA margins in mid-30% range will produce free cash flows of more than $4 billion. Key assumptions include capex to revenue near 15% and average borrowing costs of approximately 5.5%. We expect video PSU's to fall by low single digit percent, and data PSU's to rise by mid-single digit percent. We assume ramping the mobile wireless business will be a net cash cost of near $1 billion (over the next 12 to 18 months). We expect key credit metrics to remain stable or improve, with leverage projected to fall within our tolerances, and free cash flow to debt to rise from 5% (LTM Q3), to near 6% by 2020. We expect liquidity to remain good.

Moody's would consider an upgrade if:

» Leverage (Moody's adjusted debt/EBITDA) is sustained below 4.0x, and

» Free cash flow-to-debt (Moody's adjusted) is sustained above 5%

An upgrade would also be conditional on a high level of confidence that further deterioration in the voice and video business, and or losses in mobile services will not materially change the credit profile of the business.

Moody's would consider a downgrade if:

» Leverage (Moody's adjusted debt/EBITDA) is sustained above 4.5x, or

» Free cash flow-to-debt (Moody's adjusted) is sustained below low single digit percent

We would also consider a negative rating action if further deterioration in the voice and video services, and or losses in mobile services materially and unfavorably changed the credit profile of the Company.

Charter Communications, Inc., headquartered in Stamford, Connecticut, provides video, data, phone, and wireless services to over 50 million U.S. homes and businesses, penetrating approximately 35% (Moody's calculation of the triple-play-equivalent) of homes passed in its footprint. Across this footprint, Charter serves 27 million residential and 2 million commercial customers under the Spectrum brand, making it the second-largest U.S. cable company behind only Comcast Corporation (Comcast, A3 stable). Revenue for the last twelve months ended 30 September 2019 was approximately $45.2 billion.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Jason Cuomo
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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