More Business News:
Fitch Affirms Cox Enterprises and Subsidiaries IDR at 'BBB'; Outlook Stable
CHICAGO -- Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) for Cox Enterprises, Inc. (CEI) and its wholly owned subsidiaries Cox Communications, Inc. (CCI) and Cox Radio, Inc. (CXR). Fitch also affirmed the individual issuer ratings of CEI and its subsidiaries (as outlined below). The Rating Outlook is Stable. Approximately $11.7 billion of debt outstanding as of March 31, 2010 is affected.
Fitch's affirmation of CEI's ratings recognizes the diversification and market leading positions of CEI's businesses, sound financial flexibility given the rating and the solid operating profile and competitive position of the company's cable business. While Fitch expects that CCI will generate the majority of CEI's consolidated revenues and cash flow, CEI's credit profile benefits from diversified revenue streams and cash flow generation. Acknowledging the cyclical and secular challenges existing within CEI's portfolio of businesses, Fitch believes that each of the company's segments is positioned to generate positive free cash flow over Fitch's ratings horizon. From Fitch's perspective the company's decision to reduce its exposure to secular risks of the newspaper business and the restructuring and integration efforts within its Cox Media Group segment have strengthened the company's overall operating profile.
Overall, Fitch's ratings of CEI reflect the size and strong competitive position of CCI, the company's largest business segment and the third-largest cable multiple system operator (MSO) in the U.S. CCI's operating profile derives its strength from its formidable subscriber clustering profile in the company's 19 primary markets, and growing revenue diversity due to the ongoing success of its triple play service offering and strengthening commercial business. In Fitch's opinion, CEI's cable business, and the cable industry overall, has proven to be resilient to persistent competitive pressures and weak housing formation and employment markets.
CEI's ratings are supported by the company's conservative financial policies and commitment to investment grade ratings. On a consolidated basis, Fitch estimates CEI's leverage as of March 31, 2010 was 3.0 times (x), and progressing down to the company's leverage target of 2.5x. Fitch believes that through anticipated debt reduction, largely at CCI, as well as operating cash flow growth, the company can achieve its leverage goal by the end of 2011, strongly positioning the company's credit profile within the 'BBB' category. Fitch believes that acquisitions will remain a part of the company's growth strategy as it seeks to grow and diversify its businesses. Fitch believes that acquisitions will be conducted within the context of achieving and maintaining the 2.5x leverage ratio, and that any transactions that result in leverage above this metric will be followed by a period of focused deleveraging. Fitch expects CCI's operating profile, which generated 80% of consolidated EBITDA, will have the greatest influence on the pace of CEI's anticipated credit profile improvement, as the competitive operating environment has resulted in modest revenue growth (relative to historical performance), pressured EBITDA margins and declining capital intensity.
Ratings concerns center on CCI's ability to maintain its relative market position given the challenging competitive environment, its ability to grow residential revenues beyond its core 'Triple Play' service offering, the execution risks and capital requirements related to the launch of CCI's wireless business, and potential operating margin pressure from rising programming costs and the dilutive impact related to the company's wireless initiative. Outside of CEI's cable business, additional concerns focus on CEI's exposure to the auto industry and the ongoing cyclical and secular issues within the company's media businesses. Through its operating segments - Manheim (transactions), AutoTrader.com (subscriptions) and Media (advertising), Fitch believes that nearly one-third of consolidated revenue is derived from the automotive industry.
The introduction of a wireless business, which is expected commercially during the second half of 2010, creates a powerful quadruple play service offering and presents CCI with an opportunity to enhance its competitive position and grow revenues outside of its core cable business. However, the execution risks surrounding the launch of a new service along with the related incremental capital and operating costs elevate the business risks associated with CCI's credit profile. Specifically, in comparison to other cable MSO's wireless strategies, CCI's wireless model is more offensive in nature as the company plans to offer both wireless voice and data services, which Fitch views as a higher risk strategy. Fitch expects that the operating losses generated during the start-up phase of wireless operations will strain CCI's overall operating margins and diminish EBITDA and free cash flow growth rates.
In Fitch's opinion, CEI's liquidity position is solid given its current rating and is supported by over $4.7 billion of available borrowing capacity (net of $73.2 million of outstanding commercial paper) under existing unsecured credit facilities, demonstrated access to capital and bank markets, and expected free cash flow generation. The company maintains revolvers at CEI, CCI and CXR, all of which are set to expire in July 2011. Fitch expects the company to launch a refinancing of the facilities during the fall of 2010 which will likely result in a reduction in revolver commitment, while not weakening CEI's financial flexibility given current overcapacity.
On a consolidated basis, CEI generated over $1.3 billion of free cash flow during the latest 12 month (LTM) period ended March 31, 2010, including approximately $1 billion (before dividends to CEI) at CCI. Looking ahead, as a result of higher cash taxes, due to the expected absence of tax benefits in 2010 associated with the economic stimulus that reduced cash taxes during 2009, coupled with the incremental capital requirements related to CCI's wireless deployment, Fitch estimates that free cash flow generation will be under $1 billion in 2010. Fitch believes that EBITDA growth and lower interest cost (predicated on anticipated debt reduction at CCI) will spur free cash flow generation to over $1.1 billion in 2011 and approximately $1.5 billion in 2012.
CEI's maturity schedule is manageable and Fitch believes that the company has sufficient financial flexibility through expected free cash flow generation, available borrowing capacity from the revolver and capital market access to address the near-term maturities. Scheduled maturities for the balance of 2010 total approximately $1.3 billion (excluding the $532 million of non-recourse securitized receivables at MAFS) followed by $1.2 billion in 2011 (including $600 million currently outstanding under CEI's revolver at March 31) and approximately $1 billion in 2012.
The Stable Rating Outlook reflects Fitch's expectation that the company's credit protection metrics will strengthen and that CEI's financial policy will continue to reflect a 'BBB' rating. Additionally, the Stable Outlook also incorporates Fitch's expectation that the company's operating profile will not materially decline during the near term in the face of competition and current economic conditions. A Positive Rating Outlook could be considered as the company approaches its leverage target and demonstrates behavior consistent with maintaining its leverage around the 2.5x target. Negative ratings actions would coincide with a change in the company's capital structure policy or an event such as a debt financed dividend or leveraging acquisition that would drive leverage higher than 3.75x for a sustained period of time. Additionally, ratings pressure could result should the capital requirements associated with CCI's wireless initiative exceed expectations and negatively affect the company's ability to generate free cash flow.
The IDR of CEI, CCI and CXR are linked in accordance with Fitch criteria. This linkage essentially gives standalone CEI credit for cash flows achieved at the CCI and CXR subsidiary levels, since there are no material restrictions on cash flows between the entities and common management. While no cross defaults or cross guarantees exist between the entities, (with the exception of CEI's guarantee of the Cox Radio RCF, which was put in place subsequent to CEI's purchase of the 23% equity stub in 2009), Fitch believes that CCI's probability of default would be understated (rated higher) if it did not consider CEI's businesses and weaker credit profile. At the same time, Fitch believes it would overstate CEI's probability of default if Fitch were to only look at its businesses on a standalone basis and not consider potential upstream cash flows from CCI/CXR cash flows it could access in distress.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Fitch has affirmed the following ratings with a Stable Outlook:
Cox Enterprises, Inc.
--IDR at 'BBB';
--Senior unsecured debt at 'BBB'.
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Cox Communications, Inc.
--IDR at 'BBB';
--Senior unsecured debt at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Cox Radio, Inc.
--IDR at 'BBB';
--Senior unsecured debt at 'BBB'.
Additional information is available at www.fitchratings.com.
Related Research:
Corporate Rating Methodology
www.fitchratings.com
Liquidity Considerations for Corporate Issuers
www.fitchratings.com
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: FITCHRATINGS.COM IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.