Rating Action: Moody's assigns Ba3 to CSC Holding's $1 billion guaranteed notes
Global Credit Research - 03 Aug 2020
NOTE: On August 4, 2020, the press release was corrected as follows: In the debt list, the issuer name was changed to CSC Holdings, LLC. Revised release follows.
New York, August 03, 2020 -- Moody's Investors Service ("Moody's") assigned a Ba3 rating to CSC Holdings, LLC's (CSC) planned issuance of $1 billion (unsecured) Guaranteed Notes due 2031. The B3 rating on the existing (unguaranteed and unsecured) Senior Notes due 2030 are unaffected by a planned $1.7 billion add-on. CSC's B1 corporate family rating (CFR), B1-PD probability of default rating (PDR), and all other instrument ratings are unaffected by the proposed transaction. Liquidity remains very good. The outlook is stable.
CSC (a wholly owned subsidiary of Altice USA) is issuing $1 billion in new 10.5 year (5.5-year non-call, unsecured) Guaranteed Notes and raising $1.7 billion as an add-on to the existing 4.625% (unguaranteed, unsecured) Senior Notes due 2030 to refinance existing indebtedness. Net proceeds, together with cash on the balance sheet, will be used to fully repay the existing $1 billion of 6.625% (unsecured) Guaranteed Notes due 2025 and $1.684 billion in 10.875% (unguaranteed, unsecured) Senior Notes due 2025, and pay fees, costs and expenses associated with these transactions. Moody's will withdraw the ratings on the repaid instruments upon transaction close.
The 2031 note guarantors (CSC and its subsidiaries), that also guarantee the existing senior unsecured guaranteed notes and the credit facilities, contributed approximately 83% of the total assets of the Restricted Group as of June 30, 2020, approximately 90% of the net revenues and approximately 99% of the Adjusted EBITDA of the Restricted Group for the six months ended June 30, 2020. The restricted group includes Cablevision Lightpath NJ, LLC (Lightpath) which is currently a guarantor under the existing senior guaranteed notes (except for the 2029 and 2030 notes). However, Lightpath and the guarantors within the Lightpath Group will not guarantee the new 2031 notes.
Moody's expects the current refinancing transaction to extend the weighted average maturity profile and lower weighted average cost of debt, while not materially changing leverage ratios or the proportional mix of secured and unsecured debt, or the resultant creditor claim priorities in the capital structure.
On Tuesday, July 28, Altice USA, announced that it has agreed to sell 49.99% of Lightpath Group, its fiber enterprise business, to Morgan Stanley Infrastructure Partners (MSIP) for total cash proceeds of about $2.3 billion. Altice USA will retain a 50.01% interest in Lightpath Group, and maintain control of the company, but it will be refinanced outside the restricted group with non-recourse debt on a leverage-neutral basis, and operated as a joint venture. The transaction is currently expected to close in Q4 2020.
As of June 30, 2020, Lightpath had over 11,400 buildings connected to its fiber network, with a fiber optic network that consists of more than 8,800 route miles, including approximately 600,000 miles of fiber, throughout the New York metropolitan area. At close, Lightpath Group is expected to become an unrestricted subsidiary and all guarantees (of the credit facility and existing guaranteed notes) provided by Lightpath and its guarantors will be released. Collectively, Lightpath Group had assets representing approximately 4% of the total assets of the Restricted Group as of June 30, 2020, generated net revenues representing approximately 4% of the net revenues, and Adjusted EBITDA representing 5% of the Adjusted EBITDA of the Restricted Group, respectively, for the six months ended June 30, 2020.
Lightpath group is a valuable asset, sold at a very high multiple (approximately 14.6x fiscal 2019 management adjusted EBITDA) with an estimated $3.2 billion enterprise value, but it represents a relatively small share of consolidated profitability. Despite the temporary challenges many small and medium sized businesses are facing due to COVID-19, we expect commercial demand for fiber network connectivity and solutions to continue rising with the development of high-speed communications such as broadband wireless (e.g. 5G) and commercial IoT. Management is hoping the infusion of capital and its strategic partner, with experience in telecommunications infrastructure and deep operational and management expertise, will help Lightpath unlock its future potential, while allowing Altice USA to focus on operating its core businesses.
..Issuer: CSC Holdings, LLC
....Gtd Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD3)
CSC's B1 CFR is supported by its large size (approximately $9.8 billion in revenue LTM, end of last quarter) and somewhat diversified footprint with a strong market position in its Optimum footprint which has very favorable market dynamics. This strength is reflected in very high, industry leading operating metrics including investment-grade-like EBITDA per homes passed (EPH) and the Triple Play Equivalent (TPE) ratio. The company has an upgraded network that produces superior network speeds that helps it compete with in-market peers and attract and retain residential and commercial customers, particularly broadband which helps to offset weakness in video and telephony. Residential broadband's strong revenue growth and profitability supports high margins in the broader business and is a significant contributor to the company's free cash flow. We expect this strength to continue, supported by network investments. The company also has very good liquidity.
CSC's B1 CFR is constrained by a less than conservative financial policy that tolerates high leverage (over 5.5x, Moody's adjusted LTM June 30 2020) and substantial stock buybacks funded principally with most available free cash flow. Additionally, CSC's video and voice businesses are weakening, evidenced by a decline in the subscriber bases and the company's market share (the Triple Play Equivalent ratio) in these product lines.
Moody's rates CSC's senior secured bank debt facilities Ba3 (LGD3), one notch above the B1 CFR. The secured debt has a stock pledge and is guaranteed by the operating subsidiaries of the Company. Bank lenders benefit from junior capital provided by the senior unsecured bonds at CSC (which have no guarantee). We rate the senior unsecured guaranteed notes at CSC Ba3 (LGD3), pari-passu with the senior secured creditors with the benefit of the same guarantee from the restricted subsidiaries (as the credit facility creditors) and our view that the stock pledge for secured lenders provides no additional lift/benefit given the guarantees from the operating subsidiaries. Also, Moody's rates CSC's senior unsecured (non-guaranteed) notes B3 (LGD5), two notches below the B1 CFR, given the subordination in the company's capital structure. The instrument ratings reflect the probability of default of the company, as reflected in the B1-PD Probability of Default Rating, an average expected family recovery rate of 50% at default given the mix of secured and unsecured debt in the capital structure, and the particular instruments' ranking in the capital structure.
CSC has very good liquidity, reflected in its SGL-1 liquidity rating. Liquidity is supported by strong operating cash flow, an undrawn $2.475 billion revolving credit facility, and covenant-lite loans. The company also benefits from a favorable maturity profile with no maturities in 2020 and about $1 billion or less coming due annually through 2024, which can be fully covered by free cash flows.
The stable outlook reflects our expectation that the company will generate an average of approximately $10.5 billion in annual revenues over the next 12-18 months, and about $4.5 billion in EBITDA on margins in the low to mid 40% range. We expect free cash flows to average approximately $1.5 billion annually, after capital expenditures of about $1.3 billion (low teen percent of revenue). We project leverage (gross debt/EBITDA) to improve over the next 12-18 months but remain high with free cash flows used to repurchase stock rather than voluntarily repay debt. FCF/debt will rise to 6%-7%, and interest coverage (EBITDA-CAPEX/ interest) will rise to 2.3-2.4x. (Note: values and ratios above are Moody's adjusted). Our projections also assume the company's market share will fall to approximately 35%, measured using our Triple-Play-Equivalent ratio, and EBITDA per homes passed will be above $500. Key assumptions include a rise in broadband subscribers of at least low single digit percent, and video subscribers' losses of at least low single-digit percent. Our outlook assumes the company maintains its very good liquidity profile.
CSCs' governance presents a moderate risk to the credit profile. In particular, financial policy is less than conservative, tolerating moderately high leverage (over 5.5x, Moody's adjusted LTM) for the quarter ended March 31, 2020, and higher in past years). We believe management's calculation of leverage is approximately .25x lower than Moody's, and above its target ratio of between 4.5x-5.0x (calculated based on L2QA EBITDA and net debt excluding finance leases). The company also has an aggressive share repurchase program which targets $1.7 billion of repurchases in 2020, about equal to expected free cash flow.
Ownership and voting control are also concentrated in Next Alt, a personal holding company of Patrick Drahi, the largest and controlling shareholder of Altice USA. This level of control creates governance risk, with Next Alt in control of all matters submitted to stockholders for approval. Mr. Drahi, through Next Alt is able to significantly influence the composition of the Board of Directors and thereby influence policies and operations, including the appointment of management, future issuances of Altice USA common stock or other securities, the payment of dividends, the incurrence or modification of debt, amendments to the certificate of incorporation and bylaws, and entering into extraordinary transactions including acquisitions or the sale of the company (e.g. a change in control). Additionally, as a controlled company, there is no requirement, and the company does not have a majority of independent directors on its Board of Directors or a nominating and governance committee.
We also note Next Alt holds the largest share of the economic interest and controlling interest in the voting rights of Altice Europe. Our view of the credit risk, and governance structure would turn negative should the controlling shareholder of these formerly combined companies use its common ownership to execute (or even contemplate) a related party transaction, beyond normal operating activities (e.g. corporate transactions such as direct or indirect investments or loans, or similar cash or non-cash support regardless of the form or structure) that is unfavorable to CSC.
The rapid and widening spread of coronavirus, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive shock that is unprecedented in many sectors, regions, and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
However, we believe the cable sector has less exposure than many others. We believe subscriber losses in voice and video have temporarily moderated, and there has been much greater demand in residential broadband. Video viewership and engagement is rising sharply, with subscribers spending extraordinary time watching TV for news, and there has been a significant rise in viewership for entertainment programming, and movies with a complete shut-down of US cinemas. Usage has become more evenly distributed with a sharp rise in online commerce and the shift to remote work and distance learning.
Any negative implications disruptions to direct selling, on-premise installations and service, small and medium sized businesses, advertising, certain programming (sports and new production / content), and operations (component supply chains, construction / network upgrades) - will likely be only a temporary and partial offset. We expect higher bad debt expense and the loss of advertising revenue will be the most significant most negative implications, but largely offset by savings in operating expenses with operators benefiting from lower sales, marketing, and service costs.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could consider an upgrade if:
Debt/EBITDA (Moody's adjusted) was sustained below 5.0x, and
Free cash flow to debt (Moody's adjusted) was sustained above 5.0%
An upgrade could also be considered or contingent on a stable subscriber base, or more conservative financial policy.
Moody's could consider a downgrade if:
Debt/EBITDA (Moody's adjusted) is sustained above 6.25x, or
Free cash flow to debt (Moody's adjusted) is sustained below 3%
A downgrade could also be considered if liquidity deteriorated, there was a material and unfavorable change in operating performance, or the company adopted a more aggressive financial policy.
Headquartered in Long Island City, New York, CSC passes approximately 8.9 million homes in 21 states, serving approximately 5 million residential and business customers and 9.7 million residential primary service units (PSU's). The company is wholly owned by Altice USA, a public company majority owned and controlled by Patrick Drahi. Revenue for the last twelve months ended June 30, 2020 was approximately $9.8 billion.
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.
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.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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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
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