Charter Communications Operating, LLC -- Moody's assigns a Ba1 rating to Charter's new senior secured notes

Rating Action: Moody's assigns a Ba1 rating to Charter's new senior secured notesGlobal Credit Research - 18 Feb 2021New York, February 18, 2021 -- Moody's Investors Service ("Moody's") assigned a Ba1 rating to Charter Communications, Inc.'s (Charter or the company) senior secured notes (maturing in 2041 and 2052) issued at Charter Communications Operating, LLC and Charter Communications Operating Capital Corp. In conjunction with the transaction the company will also be issuing an add-on to its existing senior secured notes due 2061. Charter's Ba2 corporate family rating (CFR), Ba2-PD probability of default rating, all instrument ratings and the stable outlook are unaffected by the proposed transaction.Moody's expects the terms and conditions of the newly issued notes will be materially the same as existing senior secured notes, ranking equally in right of payments with all of Charter's existing and future senior debt, and will be guaranteed on a senior secured basis.Moody's views the transaction as credit neutral. Charter intends to use the net proceeds from the sale of the Notes for general corporate purposes, including to fund potential buybacks of Class A common stock of Charter or common units of Charter Communications Holdings, LLC, to repay certain indebtedness and to pay related fees and expenses. We believe any incremental leverage (net of repayment) will not materially change the credit profile or the proportional mix of secured and unsecured debt, or the resultant creditor claim priorities in the capital structure.Assignments:..Issuer: Charter Communications Operating, LLC....Senior Secured Regular Bond/Debenture, Assigned Ba1 (LGD3)RATINGS RATIONALECharter Communications, Inc.'s (Charter) credit profile is supported by the Company's substantial scale and share of the US pay-TV market which is protected by a superior, high-speed network with limited competitive overlap. Charter is the second largest cable company in the United States, serving approximately 31.1 million residential and commercial customers across 41 states, generating approximately $48.1 billion in revenue for the year ended December 31, 2020. Strong and sustained broadband demand drives growth and profitability, providing an operating hedge to weakness in the secular decline in video and voice services. The business model is also highly predictable, with a largely recurring revenue base. Liquidity is also very good, including free cash flows of $6-$7 billion annually which provides significant financial flexibility.The credit profile is constrained by governance risk, including a financial policy that targets a net leverage ratio of 4.0-4.5x. Absent acquisitions, Moody's expects the majority of free cash flow to be used for share repurchases. High absolute debt levels (over $82 billion, Moody's adjusted at Q4 2020) can also represent a refinancing risk when maturities are larger than internal sources of repayment, but maturities will be balanced and minimal relative to free cash flows through 2024. Charter is also exposed to secular pressure in its voice and video services which is losing subscribers due to intense competition and changes in media consumption, driving penetration rates lower. Additionally, Charter's growing mobile wireless services uses a mobile virtual network operator (MVNO) model that will have steady-state economics that are less favorable than its existing cable model and is currently producing negative cash flows. Regardless, we expect scaling the business will drive revenue growth and diversity in the business, and allow Charter to participate in growth of high-speed wireless broadband while improving customer retention rates.The SGL-1 liquidity rating reflects good liquidity with positive free cash flow, a fully undrawn $4.75 billion revolver facility, and only incurrence-based financial covenants. However, alternate liquidity is limited with a largely secured capital structure.Moody's rates the senior secured 1st lien credit facilities and senior secured 1st lien notes at Charter Communications Operating, LLC, Time Warner Cable, LLC, and Time Warner Enterprises LLC Ba1 (LGD3), one notch above the Ba2 CFR. Secured lenders benefit from junior capital provided by the senior unsecured bonds at CCO Holdings, Inc. (which have no guarantees). The senior unsecured notes at CCO Holdings, Inc. are the most junior claims and are rated B1 (LGD5), with contractual and structural subordination to all other obligations.Instrument ratings reflect the Ba2-PD (Probability of Default Rating) with a mix of secured and unsecured debt, which we expect will result in an average rate of recovery of approximately 50% in a distressed scenario.The stable outlook reflects our expectation that debt, revenues, and EBITDA will range between approximately $82-$87 billion, $50-$54 billion, and $18-$20 billion, respectively over the next 12-18 months. We project EBITDA margins of 36%-37%, producing average annual free cash flows of $6-$7 billion. Key assumptions include capex to revenue averaging 15%-16%, and average borrowing costs of approximately 5%. We expect video subscribers to fall by low to mid-single digit percent, and data subscribers to rise by mid-single digit percent over the next year. We expect key credit metrics to remain stable or improve, with leverage remaining within our tolerances, at or below 4.5x over the next 12-18 months, and free cash flow to debt in the high single digit percent range. We expect liquidity to remain very good.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody'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 maintaining very good liquidity, a more conservative financial policy, limited event risk, and stable operating performance.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 percentWe would also consider a negative rating action if liquidity deteriorated, financial policy implied higher credit risk, scale or diversity was lower, or there were unfavorable and sustained trends in operating performance or the business model.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.Charter Communications, Inc., headquartered in Stamford, Connecticut, provides video, data, phone, and wireless services to 57.9 million primary service units (PSU's), including both residential and commercial (and 2.4 million mobile lines). Across its footprint, which spans 41 states, Charter serves 31.1 million residential and commercial customers under the Spectrum brand, making it the second-largest U.S. cable operator. Revenue for the year ended 31 December 2020 was approximately $48.1 billion.REGULATORY DISCLOSURESFor 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. 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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_1243406.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. Jason Cuomo Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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