Fitch Rates Mediacom LLC Senior Unsecured Notes Issuance 'B'; Outlook Stable
Fitch Ratings has assigned a 'B/RR5' rating to Mediacom LLC's (Mediacom) proposed $250 million issuance of senior unsecured notes due 2022. Proceeds from the issuance together with borrowings from its revolving credit facility are expected to be used to repay amounts outstanding under Term Loan D (approximately $294 million outstanding as of Sept. 30, 2011). Mediacom is a wholly owned subsidiary of Mediacom Communications Corporation (MCCC). As of Sept. 30, 2011, Mediacom had approximately $1.6 billion of debt (principal value) outstanding including $1.25 billion of senior secured debt. On a consolidated basis MCCC has approximately $3.6 billion of debt.
The transaction is a modest positive for Mediacom as it improves the company's overall financial flexibility by extending the maturity profile and reduces the amount of senior secured debt within the capital structure; however, credit protection metrics will be largely unaffected.
Mediacom's credit protection measures have improved since the close of the privatization transaction in March 2011 which increased the company's leverage to 6.4 times (x). Mediacom's leverage declined to 6.2x as of the latest 12-month (LTM) period ended Sept. 30, 2011, somewhat faster than originally anticipated. Fitch continues to expect that the company will utilize free cash flow generation to reduce outstanding debt, which when combined with modest operational improvement will strengthen credit protection metrics to a level more reflective of the current rating category. Fitch anticipates Mediacom's leverage will approach 6x as of year-end 2011 and decline below 5.8x by year-end 2012 provided that the company uses its free cash flow to reduce outstanding debt.
Overall, Mediacom's ratings incorporate the company's relatively stable operating profile considering the competitive operating environment, in addition to weak housing and high unemployment trends. While Mediacom's service penetration levels and average revenue per unit (ARPU) profile continue to trail industry leaders as well as comparable rural-oriented cable operators, Fitch acknowledges potential growth and operating profile enhancements that can be captured by increasing service penetration levels as well as capitalizing on commercial revenue growth potential.
Rating concerns center on the company's high leverage relative to its peer group and other larger cable multiple system operators (MSOs), a comparatively weaker subscriber clustering profile and service penetration rates that lag behind industry leaders, and Medicom's ability to maintain its competitive position relative to the threat posed by the direct broadcast satellite (DBS) operators. Additional concerns center on Mediacom's ability to grow retail revenues beyond the company's core 'triple-play' service offering. Fitch points out that event risks related to how Mediacom intends to use existing borrowing capacity on its revolvers and free cash flow generation are elevated within the company's overall credit profile.
Mediacom's liquidity position is sufficient given the current rating and is primarily supported by the borrowing capacity from its $225 million ($122.8 million available for borrowing as of Sept. 30, 2011), and expected free cash flow generation. The company's revolver commitment will expire in December 2014. Scheduled maturities total $12 million during 2012 and 2013 consisting of amortization from the company's credit facility. Mediacom generated approximately $56.6 million of free cash flow (defined as cash from operations less capital expenditures and dividends) during the LTM period ended Sept. 30, 2011 and is positioned to generate consistent levels of free cash flow over the ratings horizon.
Positive rating actions would be contemplated if leverage declines below 5x, strengthens free cash flow generation, and the company demonstrates progress in closing gaps relative to its industry peers on service penetration rates and strategic bandwidth initiatives. Fitch believes that negative rating actions would likely coincide with a leveraging or shareholder-friendly transaction that increases leverage beyond 6.5x without a clear path to de-leverage, the adoption of a more aggressive financial strategy, or a perceived weakening of Mediacom's competitive position.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The issuer did not participate in the ratings process, or provide additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Global Telecoms Companies' (Sept. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Global Telecoms Companies - Sector Credit Factors
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