Fitch Affirms DISH's IDR at 'BB-'; Revises Outlook to Negative

Business Wire, Jan 21, 2009

CHICAGO -- Fitch Ratings affirms the 'BB-' Issuer Default Rating (IDR) assigned to DISH Network Corporation (DISH)and its wholly owned subsidiary DISH DBS Corporation (DDBS). Fitch has also affirmed the 'BB-' rating assigned to the senior unsecured notes issued by DDBS Corporation. Approximately $6 billion of debt as of the end of the third quarter of 2008 is affected by Fitch's action. The Rating Outlook has been revised to Negative from Stable.

The Negative Rating Outlook reflects DISH's deteriorating operating profile and eroding competitive position in an increasing competitive environment and the company's strained liquidity position which Fitch expects could be further pressured by the uncertainty related to the resolution of the Tivo, Inc. litigation and the capital requirements related to a potential investment in a wireless network.

DISH's operating profile is centered on its maturing video service offering and lacks the revenue diversity and revenue growth opportunities relative to its cable multiple system operator (MSO) and growing telephone company competition. In addition DISH has positioned its brand as a low cost provider, which when combined with high subscriber churn levels results in subscriber base that is less valuable (based on lifetime revenue and EBITDA perspective) and more vulnerable to economic conditions. From Fitch's perspective, DISH's operating strategy has weakened its competitive position as the multichannel video distribution market continues to be driven by the bundling strategy of services, led by the widespread availability of the 'Triple Play' service from cable MSOs and telephone companies.

Fitch believes that the effects of growing competition, the economic recession and increased subscriber churn rates will weigh on DISH's operating results during 2009, likely resulting in lower gross additions, sluggish average revenue per user (ARPU) growth rates, increasing customer retention spending and limit operating margin expansion. The lower level of gross additions and the resultant reduction of absolute subscriber acquisition expenses can provide DISH with a short-term impetus to increase operating margins. However Fitch expects this effect to be offset by higher customer retention and service spending as well as higher costs related to satellite transmission expenses and equipment purchases in connection with the spin-off of assets to EchoStar.

Key to DISH's continued EBITDA and free cash flow growth is its ability to control subscriber churn while balancing retention spending and new customer acquisition costs with overall subscriber profitability. Subscriber churn increased 8 basis points during the third quarter of 2008 relative to the same period last year to 2.02%, which when combined with an 8.7% year-over-year reduction of gross additions, led to a subscriber decline of 10,000 during the third quarter. The higher churn rate continues to be driven by a combination of economic, competitive and operational factors, including piracy and fraud. In Fitch's opinion, some of these factors, such as higher non-pay disconnects and decreased customer satisfaction, appear to require longer-term fixes, and churn may remain elevated for an extended period of time, reflecting the company's relatively weak competitive position. Additionally, in a high subscriber churn environment, Fitch believes that it may prove difficult for DISH to expand ARPU as the company uses price discounts to drive subscriber volume.

Fitch believes that DISH's liquidity position is constrained given the company's large cash requirements during 2008. Significant uses of cash during the first nine months of 2008 include: the transfer of approximately $1.5 billion of cash and marketable securities to EchoStar Corporation in connection with the spin-off, $712 million related to DISH's acquisition of 700 MHz spectrum in the FCC's auction, $500 million related to the redemption of the company's 3% subordinated convertible notes due 2010. Additionally during the fourth quarter of 2008, DISH used additional cash to fund the redemption of DDBS's 5.75% senior notes ($971 million) and the settlement related to the Tivo litigation ($105 million of restricted cash was released from an escrow account). These cash uses were partially offset by the issuance of $750 million of senior notes and free cash flow generation.

As of Sept. 30, 2008, DISH had a total of approximately $1.4 billion of cash and marketable securities. Considering DISH's use of approximately $971.6 million of cash to retire DDBS's 5.75% senior notes due 2008, the company's pro forma cash and marketable security position as of Sept. 30, 2008 is approximately $461 million. This amount of cash is materially below historical levels, and the company does not maintain a revolver. Fitch's concern is tempered somewhat given our expectations that DISH will generate a material amount of free cash flow during 2009 and that there are no material scheduled maturities during 2009 and 2010.