OREANDA-NEWS. Fitch Ratings has placed the 'BB-' Issuer Default Rating (IDR) and outstanding debt of DISH Network Corporation (DISH) and its wholly owned subsidiary DISH DBS Corporation (DDBS) on Rating Watch Negative. Fitch has also assigned a 'RR4' recovery rating to the senior unsecured notes issued by DDBS. DISH had approximately \$13.4 billion of debt outstanding as of Sept. 30, 2014. A full list of ratings follows the end of this release.

The Negative Watch reflects the uncertainty surrounding DISH's funding strategy and potential negative affect on DISH's credit profile arising from DISH's winning bids in the FCC's Advanced Wireless Services 3 (AWS-3) auction. DISH may not be able to monetize all of its marketable securities or utilize its entire cash balance in order to maintain minimum liquidity requirements. DISH had \$4.8 billion of cash and equivalents and \$4.5 billion in marketable securities as of Sept. 30, 2014. Following fourth-quarter refinancing activity, DISH's cash balance totaled \$5.9 billion. Fitch believes the Rating Watch will be resolved when the company articulates how it intends to fund the spectrum purchase. Fitch believes a negative rating action will likely coincide with the company's decision to fund the spectrum acquisition with incremental debt and increasing consolidated leverage higher than 5x without a clear strategy to de-lever its balance sheet. Potential negative rating action is expected to be limited to one notch.

DISH's designated entities made winning bids totaling approximately \$13.3 billion in the recent AWS-3 spectrum auction. DISH's total net remaining payment is \$9.1 billion--net of \$3.3 billion in bidding credits and a \$920 million upfront down payment made prior to the start of the auction in November 2014. A payment of \$1.1 billion is due Feb. 13 and the final balance is due March 2.

KEY RATING DRIVERS

Wireless Strategy Poses Event Risk: The ratings encompass the lack of visibility into DISH's wireless strategy, and the potential capital requirements and execution risk associated with that strategy. Fitch acknowledges the significant asset value and strategic optionality associated with DISH's investment in wireless spectrum. However, in Fitch's view, DISH would need to meaningfully differentiate its wireless services in order for the strategy to successfully diversify its revenues, and to provide for potential cash flow growth. An offering similar to other wireless operators' services would likely struggle to gain traction, given the maturing wireless market and entrenched national operators. Fitch notes that the terms of its wireless spectrum assets require the company to build out a portion of the spectrum coverage area, which can pressure the company's credit profile.

DISH's efforts to transform though various wireless initiatives remain in a development stage. The company's strategy has experienced numerous set-backs as the company endeavors to engage another wireless carrier seeking a partnership, acquisition or network-sharing agreement. Event risks remain elevated as the company contemplates additional acquisitions of spectrum or assets to support the wireless strategy. The strategic importance of a wireless broadband service option has not diminished and, as such, Fitch expects DISH will likely continue its efforts to engage an existing national wireless service provider.

Elevated Leverage Threatens Ratings: Leverage rose in 2013, and has remained higher during 2014, as DISH has built cash to fund the wireless strategy. Fitch believes the higher debt levels, along with elevated execution and integration risks associated with DISH's potential wireless strategy limit the company's financial flexibility at the current ratings level.

Pro forma for fourth-quarter 2014 refinancing activity, total debt outstanding was approximately \$14.5 billion. DISH's pro forma leverage totaled 5.1x for the latest 12 month (LTM) period ended Sept. 30, 2014, an increase from 4.8x and 4.0x at year-end 2013 and 2012, respectively. The high leverage limits the company's financial flexibility within the current rating category. The cash proceeds from the company's incremental debt issuances have largely remained on its balance sheet, and will, in part, support DISH's wireless strategy.

EBITDA: Higher programming and broadband subscriber acquisition costs have had an effect on the company's operating margins and EBITDA generation. These factors contributed to a 0.2% decline in EBITDA for the LTM ending Sept. 30, 2014, relative to the full year 2013.

Ratings Reflect Weak Trends: Fitch believes the company's overall credit profile has limited capacity to accommodate DISH's inconsistent operating performance as the company struggles to transform its branding strategy from a value-oriented service provider to a technology-focused provider targeting high-value subscribers. While subscriber metrics remain weak, average revenue per user (ARPU) has benefited from programming cost increases, higher hardware-related revenue and increased advertising revenue. ARPU increased 4.4% for the first nine months of 2014 versus the prior period.

Fitch's view on the company's liquidity position is largely dependent on the amount of cash DISH intends to utilize to fund the spectrum acquisition. Overall, the company's liquidity position and financial flexibility is supported by expected free cash flow (FCF) generation. The company also benefits from a favorable maturity schedule, as 32% of the company's outstanding debt is scheduled to mature through 2018, excluding \$900 million repaid on Oct. 1, 2014. In 2015, \$650 million matures. DISH had a total of approximately \$9.3 billion of cash and marketable securities (current portion). DISH DBS holds approximately \$4.5 billion of the consolidated \$4.8 billion cash balance and more than \$3.7 billion of consolidated \$4.5 billion marketable securities balance. The high cash balances mitigate the risk caused by the lack of a revolving credit facility.

DISH's FCF (defined as cash flow from continuing operations less capital expenditures and dividends) generation rose approximately 15% during the first nine months of 2014 to \$869 million when compared to the same period during 2013. DISH's capital intensity has remained relatively stable in the 8% to 9% range in 2014. Capital expenditures will continue to focus on subscriber retention and capitalized subscriber premises equipment. The higher leverage and weaker operating profile will continue to constrain FCF generation over the ratings horizon.

Additional 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 continue 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.

RATING SENSITIVITIES

Fitch believes the Rating Watch will be resolved when the company articulates how it intends to fund the spectrum purchase.
Fitch believes a negative rating action will likely coincide with the company's decision to fund the spectrum acquisition with incremental debt and increasing consolidated leverage higher than 5x without a clear strategy to de-lever its balance sheet. Potential negative rating action is expected to be limited to one notch.

Fitch has placed the following ratings on Rating Watch Negative:

DISH Network Corporation
--IDR of 'BB-'.

DISH DBS Corporation
--IDR of 'BB-';
--Senior unsecured notes of 'BB-'.

Fitch has also assigned a 'RR4' recovery rating to the senior unsecured notes issued by DDBS.