Fitch Expects to Downgrade Cox Enterprises & Cox Communications to 'BBB-'

Business Wire, Nov 2, 2004

NEW YORK -- Fitch Ratings expects to downgrade the senior unsecured rating of both Cox Enterprises (CEI) and Cox Communications (CCI) to 'BBB-' from 'BBB' and to remove both entities from Rating Watch Negative upon successful completion of Cox Enterprises' tender offer for Cox Communication's public equity. This transaction is expected to be completed in mid-December following the expiration of the tender offer. This indicative rating is based on Fitch's current perception regarding the impact this transaction will have on the credit profiles of these entities if successfully completed.

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 for CEI to acquire the outstanding public stake of CCI for $34.75 per share. The transaction is a cash tender offer by CEI for CCI followed by a merger.

The anticipated 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 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, both CEI and CCI have bank commitments of $2.25 billion and $7.75 billion, respectively to fund this transaction. The final terms of these commitments are not complete, but Fitch expects that covenant terms will be similar to existing Cox facilities with key differences occurring related to maximum total leverage. Nevertheless, Fitch expects that debt-to-EBITDA leverage will return to investment grade levels 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.

Upon completion of this transaction, Fitch will converge the ratings of both CEI and CCI reflecting the increased flexibility to move cash between the entities as well as the unified management control. 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 made available to other investment objectives 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.

Upon consummation of the transaction, consolidated debt-to-EBITDA leverage for CEI and CCI (excluding Cox Radio) will approximate 5.2 times (x). 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.

Fitch expects that the company will remain committed to 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.