Fitch: Charter Remains on Positive Watch Despite Comcast & Time Warner Merger Termination

CCO Holding LLC's and Charter Communications Operating, LLC's 'BB' Issuer Default Ratings (IDRs) remain on Rating Watch Positive following the termination of the merger agreement announced today by Comcast Corporation and Time Warner Cable, Inc., according to Fitch Ratings.

CCOH and Charter Communications Operating, LLC's (CCO) 'BB-' IDRs were placed on Rating Watch Positive following the April 2015 announcement of the acquisition of Bright House Networks, LLC (Bright House) from Advance/Newhouse Partnership (A/N) for $10.4 billion. CCOH and CCO are indirect wholly owned subsidiaries of Charter Communications, Inc. (Charter).

According to the terms of the Bright House acquisition, all parties involved have a minimum of 30 days to reevaluate the transaction agreement's terms now that Comcast's acquisition of Time Warner has been terminated. Fitch will revisit its ratings once these discussions have been finalized.

Fitch views the acquisition of Bright House positively and believes the acquisition will strengthen Charter's overall credit profile. Fitch anticipates that Charter's leverage, pro forma for the transaction as it is currently structured, would decline to less than 3.5x (assumes the required repayment of debt issued by CCOH Safari, LLC and CCO Safari, LLC). The Bright House acquisition adds approximately two million video customers in markets largely contiguous with Charter's existing service footprint and adds attractive markets such as Orlando and Tampa Bay Florida. Fitch notes, however, that integration risks are elevated and Charter's ability to manage the integration process and limit disruption to the company's overall operations is key to the success of the transactions.

Charter's operating strategies are having a positive impact on the company's operating profile resulting in a strengthened competitive position. The market share-driven strategy, which is focused on enhancing the overall competitiveness of Charter's video service and leveraging its all-digital infrastructure, is improving subscriber metrics, growing revenue and ARPU trends, and stabilizing operating margins.

Charter's leverage as of the LTM ended Dec. 31, 2014 was 4.4x excluding the debt issued by CCOH Safari, LLC and CCO Safari, LLC. Management's leverage target remains unchanged ranging between 4x and 4.5x. The pro forma leverage coupled with the improving operating profile is reflective of a 'BB' IDR. Fitch has previously indicated that positive rating actions would likely coincide with leverage expected to be sustained below 4.5x while demonstrating progress in closing gaps relative to its industry peers on service penetration rates and strategic bandwidth initiatives.

Resolution of the Rating Watch will largely be based on Fitch's review of Charter's capital structure including assignment of potential equity credit to the convertible preferred partnership units and an assessment of the risks associated with Charter's ability to integrate cable systems acquired from Comcast and Bright House.

RATING SENSITIVITIES

--Positive rating actions would be contemplated if the Bright House acquisition goes forward as leverage is expected to remain below 4.5x;

--If the company demonstrates progress in closing gaps relative to its industry peers on service penetration rates and strategic bandwidth initiatives;

--Operating profile strengthens as the company captures sustainable revenue and cash flow growth envisioned when implementing the current operating strategy.

--Fitch believes negative rating actions would likely coincide with a leveraging transaction or the adoption of a more aggressive financial strategy that increases leverage beyond 5.5x in the absence of a credible deleveraging plan;

--Adoption of a more aggressive financial strategy;

--A perceived weakening of Charter's competitive position or failure of the current operating strategy to produce sustainable revenue and cash flow growth along with strengthening operating margins.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

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Contacts:

Fitch Ratings
Primary Analyst
Jack Kranefuss
Senior Director
+1-212-908-0791
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Constance McKay
Associate Director
+1-312-368-3148
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations:
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alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
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