Fitch Rates CCO Holdings, LLC Senior Notes 'CCC+'

Business Wire, Dec 1, 2004

CHICAGO -- Fitch Ratings has assigned a 'CCC ' rating to a proposed offering of $500 million of senior floating-rate notes issued by CCO Holdings, LLC and CCO Holdings Capital Corporation. CCO Holdings, LLC is an indirect wholly owned subsidiary of Charter Communications, Inc. (CHTR). CHTR expects to use the proceeds from the offering to pay down debt and for general corporate purposes.

CHTR's ratings reflect Fitch's expectation that the company will continue to generate negative free cash flow given the company's current operating profile and increasing cash interest requirements on debt that recently has or is scheduled to convert to cash interest payment in 2005. Additionally Fitch's ratings incorporate CHTR's highly levered balance sheet and the negative impact on basic subscriber metrics, revenue, and EBITDA growth stemming from the high business risks associated with CHTR's competitive operating environment.

During the third quarter of 2004, the company lost approximately 58,600 basic subscribers, reflecting an erosion of 1% on a sequential basis and 2.6% relative to the third quarter of 2003. The subscriber loss, among the highest in the industry, continues to demonstrate the negative impact of the competitive pressure from the direct broadcast satellite (DBS) operators. During each of the first three quarters of 2004, the rate of year-over-year basic subscriber losses has accelerated. The basic subscriber deterioration coupled with slower growth of digital subscribers (indicative of the company's high digital penetration of 44.3% as of the end of the third quarter) and the limited ability to increase prices due to the competitive environment has resulted in weak video revenue growth relative to its peer group.

Additionally, competitive pressures and rising programming costs have constrained CHTR's EBITDA growth and margin. During the third quarter of 2004, CHTR generated approximately $471 million of EBITDA, relatively flat compared with the third quarter of 2003 on a pro forma basis. EBITDA margins declined 230 basis points as increasing programming and operating costs more than offset the company's revenue growth.

For the year-to-date period ended Sept. 30, 2004, CHTR reported a negative $256 million of free cash flow, primarily driven by increased cash interest expense. From Fitch's perspective, the company's ability to generate free cash flow over the near term is constrained by limited EBITDA growth prospects and the conversion of discount notes issued by subsidiaries of CHTR to cash pay interest. Fitch expects the cash interest expense to grow during the fourth quarter as the first cash interest payment on the 9.92% senior discount notes due 2011 was paid, and the 11.75% senior discount notes due 2010 begin to accrue cash interest in January 2005. The company's liquidity position is supported by the $958 million available under the company's secured credit facility, all of which is available for borrowing under the covenant structure. CHTR's leverage metric was 9.9 times on an LTM basis. In light of Fitch's expectation of limited near term EBITDA growth, Fitch does not expect any meaningful improvement of credit protection metrics.