[July 20, 2012]

Fitch: DISH DBS' Additional Offering Has No Rating Impact

Fitch Ratings indicates that DISH DBS Corporation's (DDBS) $1 billion offering of senior notes will have the same 'BB-' rating as the company's 5.875% senior notes due 2022 issued May 2012. The notes will be issued as additional 5.875% senior notes due 2022. DDBS is a wholly owned subsidiary of DISH Network Corporation (DISH; Issuer Default Rating of 'BB-'). Proceeds from the offering are expected to be used for general corporate purposes. DISH had approximately $7.5 billion of debt outstanding as of March 31, 2012. The Rating Outlook is Negative.

The Negative Outlook encompasses the capital and execution risks associated with DISH's wireless strategy. While DISH has yet to fully articulate its wireless strategy, the company has committed over $3.5 billion of capital to acquire wireless spectrum. Fitch believes the incremental capital and operating costs associated with a potential wireless network build out will diminish DISH's ability to generate free cash flow, erode operating margins resulting in a weaker credit profile and pressuring the current ratings. Fitch believes the business risk inherent in launching a wireless business limits the flexibility the company has to increase leverage at the current ratings to accommodate the incremental capital costs and EBITDA erosion associated with the launch of a wireless network. Construction of a stand alone wireless network would have additional negative rating implications.

Fitch believes the company's overall credit profile is relatively strong within the current rating category considering the business risks attributable to DISH's core operations and the current rating has sufficient flexibility to accommodate DISH's inconsistent operating performance. However, DISH has one of the weaker competitive positions within the multi-channel video programming distributor sector, in Fitch's opinion. DISH's market positioning as a low cost and value service provider is not sustainable as all market participants are aggressive with promotional offers in an increasingly mature video service industry.

DISH lost approximately 10,000 subscribers during the seasonally weak second quarter of 2012 and has gained approximately 5,000 subscribers during the last 12 month period ended June 30, 2012. DISH is in the process of re-positioning its brand away from a value proposition to a more technology and product focus. DISH's challenge is to re-energize subscriber growth without sacrificing subscriber economics (arguably already weak) or credit quality. Key to a successful transition will be the company's ability to reduce churn while introducing new products and services valued by subscribers that are not easily replicated by competition.

DISH's credit profile has remained stable notwithstanding the inconsistent operating performance. Total debt as of March 31, 2012 was approximately $7.5 billion, relatively consistent with the debt level as of year-end 2011. DISH's leverage was 2.16x on an LTM basis as of March 31, 2012, which is consistent with year-end 2011 measures and strog for the rating category. Pro forma for the issuance (including the May 2012 issuance), DISH's leverage increases to 3.0x as of March 31, 2012. Absent further investment supporting the company's wireless strategy or shareholder friendly initiatives, Fitch expects DISH's debt level will remain consistent and for leverage to approximate 2.9x by year-end 2012.

The company's liquidity position is strong and supported by cash and marketable securities on hand and expected free cash flow generation. The company also benefits from a favorable maturity schedule as the next scheduled maturity is in 2013 totaling $500 million. As of March 31, 2012, DISH had a total of nearly $2.7 billion of cash and marketable securities (current portion) - reflecting a 32% increase compared with liquidity measures as of Dec. 31, 2011.

Fitch does note, however, that the company does not maintain a revolver, which increases DISH's reliance on capital market access to refinance current maturities, elevating the refinancing risk within the company's credit profile. The risk is offset by the company's consistent access to capital markets and strong execution.

DISH generated nearly $690 million of free cash flow (defined as cash flow from operations less capital expenditures and dividends) during the first quarter of 2012 following $902 million of free cash flow during all of 2011. Fitch expects capital intensity will be relatively consistent over the near term and that capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment. Absent further investment in a wireless network or other strategic initiative, Fitch anticipates that DISH will continue generating relatively stable levels of free cash flow during the current ratings horizon while incorporating higher levels of cash taxes.

Rating concerns center on DISH's ability to adapt to the evolving competitive landscape, DISH's lack of revenue diversity and narrow product offering relative to its cable MSO and telephone company video competition, and an operating profile and competitive position that continues to lag behind its peer group. DISH's current operating profile is focused on its maturing video service offering and lacks growth opportunities relative to its competition.

The ratings also incorporate Fitch's belief that DISH's satellite based infrastructure can put the company at a competitive disadvantage, relative to the cable MSO and telephone company's respective technology and network positions, as video content is expected to be increasingly consumed over alternative platforms and devices such as wireless (4G) and higher-speed broadband networks.

Rating Triggers

Stabilization of the Outlook at the current rating level can occur as the company demonstrates that it can execute its wireless strategy in a credit neutral manner.

Fitch believes negative rating action will likely coincide with the company's decision to execute a wireless strategy or other discretionary management decisions that weaken the company's ability to generate free cash flow, erode operating margins and increase leverage higher than 4x without a clear strategy to de-lever the company's balance sheet.

Additional information is available at 'www.fitchratings.com'. 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=647229

Rating Global Telecoms Companies - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=550205

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) 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.

[ Back To Insurance Technology's Homepage ]