Charter Communications Operating, LLC -- Moody's assigns Ba1 rating to Charter's New Senior Secured Notes; Outlook is stable

Rating Action: Moody's assigns Ba1 rating to Charter's New Senior Secured Notes; Outlook is stableGlobal Credit Research - 10 Mar 2022New York, March 10, 2022 -- Moody's Investors Service ("Moody's") assigned a Ba1 rating to new Senior Secured Notes, to be issued at Charter Communications, Inc.'s (Charter or the Company) wholly owned subsidiaries Charter Communications Operating, LLC and Charter Communications Operating Capital Corp. Charter's Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), and all instrument ratings are unaffected by the proposed Transaction. The stable outlook and SGL-1 speculative grade liquidity are unchanged.Assignments:..Issuer: Charter Communications Operating, LLC....Senior Secured 1st Lien Notes, Assigned Ba1 (LGD3)Moody's expects the terms and conditions of the newly issued obligation to be materially the same as existing obligations of the same class. Charter intends to use the net proceeds from the financing for general corporate purposes, share repurchases, to repay certain indebtedness, and to pay related fees and expenses. Moody's believes 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.RATINGS RATIONALECharter's credit profile is supported by its substantial scale and share of the US broadband market, protected by a superior, high-speed network with limited competitive overlap. Charter is the second largest cable company in the United States, serving approximately 32.1 million residential and commercial customers across 41 states, generating approximately $51.7 billion in revenue (FY 2021). Strong and sustained broadband demand drives growth and profitability, providing an operating hedge to the secular decline in video and wireline voice services. The business model is also highly predictable, with a largely recurring revenue base. Liquidity is very good, supported by free cash flows which are close to $8.6 billion (Moody's adjusted, FY 2021), providing 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, managed near the top end of the range (near 4.7x on Moody's adjusted gross debt basis for FY 2021). Despite the ability to de-lever, most free cash flow has been used for share repurchases. The Company generally raises debt to maintain pace with EBITDA growth, driving already high absolute debt levels (over $93 billion, Moody's adjusted at Q4 2021), ever higher. However, Moody's expects maturity ladders will continue to be managed prudently. Charter is exposed to secular pressure in its wireline voice and video services which are losing customers due to competition and changes in media consumption, driving penetration rates lower. Moody's also views broadband wireless technology, specifically terrestrial 5G, as a potential threat to a portion of the Company's wireline broadband business over the medium term. To manage the risk, and participate in the opportunity, Charter is ramping its own wireless services as a mobile virtual network operator (MVNO). While the wireless service has experienced rapid growth and is driving the top-line, steady-state economics at scale will be less favorable than its existing cable business model (including data, video and voice combined).The SGL-1 liquidity rating reflects very good liquidity with strong free cash flow, a partially drawn $4.75 billion revolving credit facility, and only incurrence-based financial covenants. 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 Cable Enterprises LLC Ba1 (LGD3), one notch above the Ba2 CFR. Secured lenders benefit from junior capital provided by the senior unsecured notes issued at CCO Holdings, LLC and CCO Holdings Capital Corp (which have no guarantees), the most junior claims and 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 will rise to over $100 billion and revenues and EBITDA will range between $56-$57 billion and $22-23 billion, respectively by the end of 2022. Moody's projects EBITDA margins approaching 40%, producing free cash flows of between $7-$8 billion annually. Key assumptions include capex to revenue averaging near 15%, and average borrowing costs of approximately 5%. Moody's expects video and voice subscribers to fall by low to mid-single digit percent on a long-term secular basis, and data subscribers to rise by low to mid-single digit percent. Moody's expects leverage to remain in the mid to high 4x range (Moody's adjusted gross debt/EBITDA), and free cash flow to debt to be sustained in the high single-digit percent range. Moody's expects liquidity to remain very good.Note: all figures are Moody's adjusted, over the next 12-18 months unless otherwise noted.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGMoody's could consider an upgrade if:• Leverage (Moody's adjusted debt/EBITDA) is sustained below 4.25x, and• Free cash flow-to-debt (Moody's adjusted) is sustained above 5%An upgrade could also be conditional on maintaining very good liquidity, a more conservative financial policy, and stable operating performance.Moody's could consider a downgrade if:• Leverage (Moody's adjusted debt/EBITDA) is sustained above 4.75x, or• Free cash flow-to-debt (Moody's adjusted) is sustained below low single digit percentMoody's could also consider a negative rating action if liquidity deteriorated, financial policy implied higher credit risk, or there were unfavorable and sustained trends in operating performance or the business model.Charter Communications, Inc., headquartered in Stamford, Connecticut, provides video, data, phone, and wireless services. Across its footprint, which spans 41 states, Charter serves 32.1 million residential and commercial customers under the Spectrum brand, making it the second-largest U.S. cable operator. Revenue for the year ended 31 Dec 2021 was approximately $51.7 billion. Charter is a public company. The largest shareholders are Liberty Broadband Corporation and Advance/Newhouse Partnership.The principal methodology used in this rating 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 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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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