Fitch Downgrades Cox Enterprises & Cox Communications to 'BBB-'

Business Wire, Dec 6, 2004

CHICAGO -- Fitch Ratings has downgraded Cox Enterprises (CEI) and Cox Communications (CCI) as follows:

CEI

-- Senior unsecured to 'BBB-' from 'BBB';

-- Commercial paper to 'F3' from 'F2'.

CCI

-- Senior unsecured to 'BBB-' from 'BBB';

-- Senior subordinated to 'BB ' from 'BBB-';

-- Commercial paper to 'F3' from 'F2'.

In addition, Fitch has removed the credits from Rating Watch Negative. The Rating Outlook is Stable.

These rating actions follow the recent successful completion of CEI's tender offer for CCI's public equity. Approximately 190 million CCI shares were tendered at $34.75 per share, or $6.6 billion in total, which increases CEI's ownership stake in CCI to 91.6%. The transaction was a joint cash tender offer by CEI and CCI for CCI followed by a short-form merger which is expected to close on Dec. 8, 2004. Fitch placed the 'BBB' senior unsecured debt ratings of CEI and CCI on Rating Watch Negative on Aug. 2, 2004 following CEI's proposal to acquire the 38% publicly held minority stake in CCI. On Oct. 19, 2004, CEI and CCI announced that an agreement had been reached to acquire the outstanding public stake of CCI for $34.75 per share.

The ratings incorporate the expected leverage increase at both CEI and CCI, prospects for future cash flow growth and debt reduction, increased flexibility in moving cash flow between the entities and the asset-bases at each entity. The cost of acquiring the entire CCI public stake will represent approximately $8.4 billion based on 240.5 million shares of CCI at a tender price of $34.75 per share. At this time, CEI and CCI have bank commitments of $2.25 billion and $7.75 billion, respectively to fund this transaction. New CCI bank agreement covenants include a 5.5 times (x) debt to operating cash flow coverage ratio limit through Dec. 31, 2005 and 5.0x thereafter.

Fitch expects that debt-to-EBITDA leverage will return to levels more reflective of investment grade by year-end 2005. Fitch is confident that leverage reductions will be achieved based on the strong cash flow growth prospects of the cable operations and Manheim Auctions, along with expected balance sheet strengthening from asset sales or proceeds from a private equity partner.

Fitch has converged the ratings of both CEI and CCI reflecting the increased flexibility to move cash between the entities as well as the unified management control. Under the terms of the CCI's bank facilities, restricted payments are limited to $250 million if the leverage ratio exceeds 4.5x. While Fitch believes that in the near term cash movement between CEI and CCI will be very limited due to the focus on debt reduction, over the longer term, CCI's excess free cash flow will be available for other investment objectives both inside and outside the cable operations. Finally, the material asset bases and cash flow generation at both CCI and CEI relative to the outstanding debt balance at each entity minimize the impact of structural subordination on the credit profile.

Pro-forma for the transaction, consolidated debt-to-EBITDA leverage for CEI and CCI (excluding Cox Radio) will approximate 5.2x. Fitch expects that debt-to-EBITDA leverage should fall to below 4x by year-end 2005, which Fitch believes is more reflective of an investment grade diversified company producing material free cash flow with strong EBITDA growth prospects. A material portion of the leverage reduction is based on EBITDA growth from existing operations and debt reduction from asset sales or proceeds received from a private equity partner. A majority of the near-term EBITDA growth will come from the cable operations where operational and financial growth prospects remain strong based on increasing cable modem, digital cable and telephony penetrations, a relatively stable basic subscriber base and a success-based capital spending environment. The other important part of leverage reduction is related to debt reduction from free cash flow generation, asset sales or the addition of private equity. Related to asset sales or private equity, Fitch expects that Cox will follow a path that maintains the company's flexibility to pursue future strategic opportunities while maintaining important asset portfolio and operational competitive positions necessary to sustain its credit profile within the investment grade rating category.

In the near term, Fitch expects that the company will remain committed to material financial disclosure related to the cable operations in order to maximize bond market access for the foreseeable future. Bond market access increases in importance as a part of financial flexibility with the exit from the public equity markets. Fitch views that from a relative perspective, the financial flexibility of Cox is weakened by this transaction although the company will generate material free cash flow and have access to the bank loan, securitization and private markets. Cox also has a variety of monetizeable non-core assets that can be used to raise cash proceeds.