OREANDA-NEWS. April 04, 2016. Fitch Ratings has maintained the 'BB-' Issuer Default Ratings (IDR) assigned to CCO Holdings, LLC (CCOH) and Charter Communications Operating, LLC (CCO) on Rating Watch Positive. Fitch has also affirmed the specific issue ratings assigned to CCO Safari II, LLC (CCO Safari II) and CCO Safari III, LLC (CCO Safari III). A complete list of rating actions follows at the end of this release. Approximately \\$35.9 billion of debt (principal value) outstanding as of Dec. 31, 2015 is affected by Fitch's action. CCOH and CCO are indirect wholly owned subsidiaries of Charter Communications, Inc. (Charter).

This release and maintenance of the Rating Watch are in accordance with Fitch's guidelines related to the review of Rating Watch status following Fitch's placement of the companies' ratings on Rating Watch Positive on April 2, 2015. Fitch placed CCOH and CCO's 'BB-' IDRs on Rating Watch Positive following the announcement of the acquisition of Bright House Networks (Bright House) from Advance/Newhouse Partnership (A/N). The Bright House acquisition is valued at \\$11.1 billion as of Feb. 4, 2016.

Resolution of the Rating Watch will be based largely on Fitch's review of Charter's capital structure if the transactions are completed. Further inputs will include the assignment of potential equity credit to the convertible preferred partnership units and a further assessment of the risks associated with Charter's ability to integrate cable systems acquired from TWC and Bright House. Depending on the ultimate capital structure, a one- or two-notch upgrade could be possible.

On May 23, 2015, Charter announced a merger with Time Warner Cable, Inc. (TWC) for total consideration of \\$203.28 per share as of Feb. 4, 2016, providing a total valuation for TWC of \\$80.1 billion. The offer consists of a combination of cash and Charter stock totaling \\$58.4 billion for all outstanding TWC shares. TWC shareholders have two options for the split between cash and Charter common stock: 1) \\$100.00 cash and 0.5409 shares of Charter common stock for each share of TWC common stock or 2) \\$115.00 cash and 0.4562 shares of Charter common stock for each share of TWC common stock. If shareholders choose the latter option, Charter has the financial flexibility, which may include a portion of the net proceeds from its February 2016 issuance of \\$1.7 billion of senior notes due 2024, to fund the increased cash needs. If Charter requires additional liquidity to satisfy cash funding needs for TWC shareholders, CCOH has committed financing in place for \\$5 billion of unsecured debt.

KEY RATING DRIVERS

M&A Activity Credit-Positive: Fitch views the TWC and Bright House transactions positively and believes they will strengthen Charter's overall credit profile. Fitch anticipates that Charter's total leverage, pro forma for both the TWC merger as it is currently structured and the Bright House acquisition, would be under 5x at closing. The Federal Communications Commission and the U.S. Department of Justice are expected to issue conditionally positive rulings within the next few weeks, while Charter has received approval from each state it will operate in, except California, which is expected to issue a ruling in May 2016.

Integration Key to Success: Integration risks are elevated with two simultaneous transactions, 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.

Credit Profile Changes: Charter's pro forma Fitch-calculated total leverage will exceed its target of 4x and 4.5x at closing, but is expected to fall below 4.5x within 12 months. In addition, the company stated it expects its first lien leverage to be below 3.5x following the completion of the TWC and Bright House transactions. On a pro forma operating basis, the combined company will serve 24 million customers and become the second largest cable multiple system operator in the country

Improving Operating Momentum: 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, focused on enhancing Charter's video service competitiveness and leveraging its all-digital infrastructure, is improving subscriber metrics, growing revenue and average revenue per unit (ARPU) trends, and stabilizing operating margins.

Digital Initiatives Enable FCF Growth: Charter has completed its all-digital-service transition, which, along with the introduction of its interactive IP-based video user interface, positions the company to offer a more competitive service. Fitch anticipates these initiatives will alleviate residential video subscriber losses and increase service penetration while boosting ARPUs, and translate into accelerating revenue growth, margin expansion and growing free cash flow (FCF) generation.

Strong FCF Provides Financial Flexibility: All three entities (Charter, TWC and Bright House) produce strong FCF that provide the companies, separately and in aggregate, substantial financial flexibility. Once the transactions are completed, Charter stated it will use FCF in the short term to meet existing and planned amortization, which along with EBITDA improvement is expected to lower leverage by 0.6x annually. They also stated there are no short-term plans for shareholder-friendly activities.

KEY ASSUMPTIONS

Due to the uncertainty surrounding approval of the TWC and Bright House transactions, Fitch's forecast reflects Charter on a standalone basis.

Fitch's key assumptions within the rating case for Charter include:
--Low-to-mid-single-digit cable revenue growth highlighted by continued high-speed data and commercial service revenue growth.
--EBITDA margins remain flat reflecting ARPU growth from subscribers taking more advanced video services and higher speed data service tiers, offset by increased programming costs and spending to enhance customer service and products.
--Fitch estimates Charter will generate \\$400 million of FCF in 2016, slightly less than the anticipated \\$1 billion to \\$1.2 billion of FCF during 2017 and 2018, respectively. FCF in 2016 is negatively impacted by additional interest expense related to debt issued by CCOH Safari, LLC, CCO Safari II, and CCO Safari III (collectively, Safari Entities).

RATING SENSITIVITIES

Positive rating actions would be contemplated given the following:

--The TWC merger and the Bright House acquisition go forward as expected and total leverage is below 5.0x;

--If the company demonstrates progress in closing gaps relative to its industry peers in 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 occur given the following:

--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.

LIQUIDITY

Fitch regards Charter's liquidity position and overall financial flexibility as satisfactory given the rating category. Charter's financial flexibility will improve in step with the growth of FCF generation. Charter generated \\$519 million of FCF during the year ended Dec. 31, 2015. Although FCF had been increasing due primarily to a decrease in capital expenditures driven by the completion of Charter's transition to all-digital in 2014, 2015 was negatively impacted by interest expense associated with debt issued for the transactions. The company's liquidity position includes cash of \\$5 million, excluding cash held in escrow at Safari Entities, and is supported by \\$961 million of borrowing capacity from its \\$1.3 billion revolver and anticipated FCF generation. Commitments under the company's revolver will expire in April 2018. Fitch notes that the revolver will increase to \\$3 billion as part of the TWC and Bright House transactions.

Charter's leverage as of the last 12 months ended Dec. 31, 2015 was 4.1x, excluding the debt issued by Safari Entities. Charter's total leverage target remains unchanged, ranging between 4x and 4.5x, and will remain unchanged following the completion of the transactions. Fitch recognizes that a large portion of the TWC transaction will involve senior secured debt, both at TWC and the Safari Entities, including approximately \\$22.5 billion of existing TWC senior secured debt. All existing TWC and Safari Entities first-lien debt will be rolled into CCO and will have equal and ratable security with all existing Charter first-lien debt.

Charter stated it expects its first lien leverage of 3.5x upon the closing of the transactions. Depending on the ultimate capital structure, a one- or two-notch upgrade of Charter's IDR and existing ratings could be possible provided that pro forma senior secured leverage is at or below 4x and total leverage does not exceed 5x.

Charter proactively extended its maturity profile and only 5% of outstanding debt matures before 2019, including \\$93 million and \\$102 million during 2016 and 2017, respectively. Fitch believes that Charter has the financial flexibility to retire near-term maturities with cash on hand and future FCF.

FULL LIST OF RATING ACTIONS

Fitch maintains the following ratings on Rating Watch Positive:

CCO Holdings, LLC
--Long-term IDR 'BB-';
--Senior unsecured 'BB-'.

Charter Communications Operating, LLC
--Long-term IDR 'BB-';
--Senior secured 'BB+'.

CCOH Safari, LLC
--Senior unsecured 'BB'.

Fitch affirms the following issue ratings:

CCO Safari II, LLC
--Senior secured at 'BBB-'.

CCO Safari III, LLC
--Senior secured at 'BBB-'.