Dish Network Corporation -- Moody's assigns B1 rating to DISH Network's new senior unsecured convertible notes

Rating Action: Moody's assigns B1 rating to DISH Network's new senior unsecured convertible notes

Global Credit Research - 16 Dec 2020

New York, December 16, 2020 -- Moody's Investors Service ("Moody's") assigned a B1 rating to Dish Network Corporation's (DISH) proposed new $2 billion senior unsecured notes. DISH's B1 corporate family rating (CFR), Ba3-PD probability of default rating, B1 ratings on the company's existing senior unsecured convertibles notes, and SGL-2 speculative grade liquidity rating are unchanged. Additionally, the ratings of Dish DBS Corporation (DBS), a wholly-owned subsidiary of DISH Network, including its B2 CFR, B1-PD PDR, and B2 ratings on its senior unsecured notes are unchanged. The outlook is stable.

The new convertible notes are expected to be pari passu with DISH's existing convertible notes and the proceeds are expected to be used for general corporate purposes, including 5G network buildout costs. The new notes offering brings DISH's pro-forma leverage to about 4.6x, up from the company's 4.1x leverage as of the last twelve months (LTM) ending on September 30, 2020, which remains below the 6x sustained leverage limit for its B1 CFR.

Assignments:

..Issuer: Dish Network Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned B1 (LGD5)

RATINGS RATIONALE

DISH's B1 CFR and DBS's B2 CFR reflect moderately high gross debt-to-EBITDA consolidated leverage (4.6x at Dish and 3.2x at the DBS level) as of 9/30/2020 (incorporating Moody's standard adjustments). DISH's B1 CFR is supported by the substantial asset value derived from its vast spectrum holdings, although they have yet to be deployed and monetized. DBS's B2 CFR, one notch lower than DISH's, reflects our concern that competition from cable and telecommunication companies, who offer multiple products (video, voice, and data in particular), and pressure from changing television consumption habits towards SVOD services like Netflix, Inc. (Ba3 positive) and other emerging OTT platforms, will result in increasing cord cutting of traditional linear pay TV. DBS bondholders have no legal recourse to DISH or its wireless spectrum assets. The rating also considers the company's controlling shareholder structure.

The controlling shareholder and Chairman, Charles Ergen, has until recent years, maintained a moderately leveraged balance sheet, but has demonstrated the willingness to be highly acquisitive, particularly when distressed assets are up for sale. In addition, limited transparency on fiscal policies, limited financial guidance from the company's management, and flexible indenture covenants also moderately constrain the CFR.

Pro forma for the transaction, there will be $6 billion of convertible notes outstanding at DISH. The convertible notes are not guaranteed by any of DISH's subsidiaries and accordingly rank junior to the liabilities of DISH's current and future operating subsidiaries. Therefore, the convertible notes are structurally subordinated to DBS's senior unsecured liabilities when looking only at the DBS operations and assets, including its $10.5 billion of senior unsecured notes. However, the higher CFR at DISH relative to DBS, reflects our view that the parent notes have a broader claim on the company's assets beyond the subordinated claim on DBS assets, and in particular on the significant value of DISH's unencumbered and undeveloped spectrum assets, to which DBS's debt holders have no legal recourse. We estimate that the value of these assets represents a large majority of the company's enterprise value. Based on the current capital structure, the convertible notes represent the only debt in the family that would have an unsecured claim on the equity in these spectrum assets in a bankruptcy or liquidation scenario. Moody's notes that as long as the spectrum assets are unencumbered and are not legally contributed to the DISH DBS credit, the convertible debt will continue to benefit from DISH's equity interest in these assets. An issuance of debt at the undeveloped spectrum assets subsidiaries would likely structurally subordinate the convertible and negatively impact that credit rating unless there is an upstream guarantee.

Following the new debt issuance, DISH and DBS will have about $3.8 billion of cash & cash equivalents and about $1 billion of marketable securities. With our expectation for DBS to generate solid FCF in Q4 2020 and around $450 million in the first six months of 2021, Moody's expects there will be a total of about $4.5 billion when you include pro forma starting cash and not including the marketable securities. We anticipate DISH to spend up to $2 billion or more for the 5G build out through June 2021, leaving around $2.15 billion plus some moderate cash flow at DISH which we 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 $6 billion of debt outstanding following the new debt issuance, which is far less than the perceived value of the spectrum assets it has accumulated over the years. Should DISH acquire spectrum in the C-Band auction that is currently underway in the US, we believe there will be pressure on the company to raise more debt and/or equity capital. Materially more debt could impact the company's credit ratings.

The stable outlook for DISH reflects our expectation that the $2 billion convertible notes issuance will provide adequate liquidity for DISH and DBS for the next 12 to 18 months to fund 5G buildout costs over that period and until the 2021 $2 billion maturity. However, we still have concerns that DISH will issue a considerable amount of debt or debt-like securities in the absence of a new equity investor to finance the wireless 5G buildout and startup costs which could weigh on the credit profile.

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

Given the capital needs of the company, including debt maturities and secular pressures on DBS, and the 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 if DISH 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 this rating 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 pay-TV provider and internet pay-TV provider via its SLING TV operation, with about 11.4 million subscribers as of 9/30/2020. DBS's Revenue for LTM September 30, 2020 was $12.7 billion. DISH also operates a wireless business segment, making the company a fourth US national carrier. DISH's wireless segment operates in two business units, Retail Wireless and 5G Network Deployment. Consolidated, DISH's revenue for LTM September 30, 2020 was $14.2 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.

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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.

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.

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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

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