January 12, 1999 14:53
Moody's rates EchoStar Communications Corp unit
(Press release provided by Moody's Investors Service)
NEW YORK, Jan 12 - Moody's Investors Service assigned B2 ratings to the proposed $1.9 billion of senior notes, including $500 million due 2006 and $1.4 billion due 2009, to be issued by EchoStar DBS Corporation (DBS), a wholly-owned subsidiary of EchoStar Communications Corporation (EchoStar) .
These new notes will be used to refinance all of EchoStar's subsidiary debt, for which the company has made a tender offer.
The assigned rating assumes that untendered notes will be stripped of current security interests and covenants, and rank structurally no better than the proposed new senior notes.
The ratings are also prospective and incorporate Moody's expectation that the pending ASkyB acquisition will be approved by the FCC.
Upon successful completion of the new debt issuance, Moody's will withdraw the B2 rating on Dish Ltd.'s (Dish) $624 million (face amount) of 12.875% senior secured notes under review, the B3 rating on EchoStar Satellite Broadcasting Corporation's (ESBC) $580 million (face amount) of 13.125% senior secured notes, and the Caa1 rating on DBS's $375 million of 12.5% senior secured notes.
The "caa" rating for EchoStar's $115 million of 6.75% Series C cumulative convertible preferred stock, which is not part of the tender offer, was confirmed.
EchoStar's senior implied rating has been upgraded to B2 from B3.
The rating outlook is stable.
The assigned ratings reflect the company's high leverage, which could be further weakened by additional debt-financed acquisitions over the near term.
EchoStar will also need to realize continued strong subscriber growth, in the absence of increased churn, in order to generate sufficient cash flow to adequately service its new cash-pay obligations.
Moody's notes that the company's ability to generate meaningful levels of free cash flow will likely be delayed over the next couple of years, as continued promotional subsidies are offered and greater marketing expenditures are incurred to fuel subscriber growth and retention.
The ratings also incorporate continuing regulatory uncertainty, particularly with respect to the company's ability to rebroadcast local signals, and the expense associated therewith if it is required to carry all signals in each market.
This would further delay the company's ability to generate free cash flow, although Moody's believes that flexibility will be afforded to EchoStar (and the DBS industry more generally) as the FCC attempts to stimulate a more competitive pay television environment.
Positive considerations supporting the assigned ratings include EchoStar's strong sustained subscriber growth; a strong business platform, with good prospects for garnering higher market share and monthly subscriber revenue following completion of the pending acquisition of ASkyB assets from NewsCorp/MCI; strong underlying asset value, including the contribution of ASkyB's assets for stock, which strengthens noteholders' loan-to-value measure; and an increasingly competitive product offering relative to traditional multichannel pay television service providers.
At present, Dish is wholly-owned by ESBC, which is wholly-owned by DBS, which in turn is wholly-owned by publicly held EchoStar.
The current debt ratings are heavily influenced by EchoStar's existing corporate structure and the relative rank, restrictions, and collateral support for each of the company's instruments.
However, a planned reorganization will eliminate Dish and ESBC in favor of a more collapsed corporate structure. All material assets will be consolidated under EchoStar Satellite Corporation, which will be a wholly-owned direct subsidiary of DBS.
As the company has reportedly received consents and tenders from nearly all existing noteholders, all security interests and covenants associated therewith will be removed.
Moody's suggests, nonetheless, that any "stub" notes remaining post-tender would likely be rated B3 to reflect what will effectively be their structural subordination to the new notes, which benefit from upstream subsidiary guarantees.
Alternatively, Moody's notes that the existing ratings would be upgraded if the pending refinancing is unsuccessful and the notes are subsequently returned with their full security and covenant packages intact.
EchoStar continued to realize impressive subscriber gains during 1998, adding 900,000 customers and increasing its DBS market share to 22% with 1,940,000 subscribers.
Importantly, more than one-third of the company's net adds came during the fourth quarter and almost 40% of net new industry subscribers opted for its DISH Network.
Although this represents a seasonally high period for the industry, it is less so for EchoStar given its comparatively weaker consumer electronics retail distribution network.
Rather, Moody's attributes the company's success to its aggressive "one rate" promotion, coupled with increasing evidence that PRIMESTAR's lease-model medium-power product offering may no longer be an effective competitor.
Although the "one rate" package should provide a nice boost to average monthly subscriber revenues, and at higher gross margins on the incremental portion thereof, larger subscriber subsidies will effectively extend subscriber breakeven levels.
There is also the possibility that the company could be exposed to higher churn rates and/or bad debt experience given its rebate of subscriber equipment costs, and the subsequent removal of the biggest deterrent to churning off.
DirecTV, which is owned by Hughes Electronics, still maintains more than a 50% market share, with almost 4.5 million subscribers.
Moody's expects DirecTV will remain a viable competitor given its earlier market entry and heavy advertising initiatives, which have resulted in stronger brand equity today, as well as certain programming advantages with respect to its exclusive sports contracts.
Cable operators are also increasingly upgrading their systems to compete more effectively against DBS, and new digital service tiers are expected to narrow the current programming gap.
Cable can also offer local TV channels virtually without restriction, as well as whole-house or multiple-outlet coverage (on a cost-effective basis for analog service), both of which DBS providers are still unable to match.
However, with its pending ASkyB assets, including two high-power satellites slated for launch during the second half of this year and licenses to operate 28 full-CONUS DBS frequencies, EchoStar plans to expand its program offering even further.
While local television and distant network signals are already available in certain markets on EchoStar's lineup today, the company remains limited by current regulatory and technological restrictions.
With its considerably expanded bandwidth capacity, in conjunction with potentially increased regulatory flexibility, the company plans to offer a 500-channel single-dish service that includes local market signals for much of the country.
The company's local strategy will not be without its cost, however, as considerable expenditures are expected to be required in order to repoint existing subscriber dishes and change out reception equipment, regardless of whether or not local packages are elected.
EchoStar also plans to offer Internet access, data services, additional tiering, and international programming. Although all of these services represent potential upside, with only limited cost to be incurred on the downside, they are generally not given much weight in the assigned ratings.
Moody's remains concerned about the company's ability to service $2 billion of debt, which is likely to grow given potential strategic acquisitions that would be permitted in accordance with the high level of flexibility afforded by the terms of the notes' indenture.
Specifically, EchoStar can incur indebtedness of up to $1,250 per acquired subscriber, plus an additional $700 million of pari-passu debt, $500 million of which can be secured and both of which are carved out of the company's relatively high 8x incurrence test.
Utilization of this flexibility over the near term could place considerable strain on the company's liquidity position and/or its ability to adequately service an already high debt service level relative to cash flow available for the same.
Headquartered in Littleton, Colorado, EchoStar is a high-power DBS provider with nearly two million
subscribers.
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