Fitch Assigns First-time ‘B+’ Rating to Liberty Cablevision of Puerto Rico; Outlook Stable

CHICAGO–(BUSINESS WIRE)–Fitch Ratings has assigned a Long-Term Foreign Currency Issuer Default
Ratings (IDRs) of ‘B+ to Liberty Cablevision of Puerto Rico LLC (LCPR).
The Rating Outlook is Stable.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

LCPR’s ratings reflect the company’s strong business position as the
leading pay-TV and broadband services provider in Puerto Rico. The
company has extensive network coverage and quality, and strong brand
recognition. The ratings also incorporate the company’s improved scale
and cash flow generation following the acquisition of Choice in 2015,
and adequate liquidity. The ratings are tempered by LCPR’s high leverage
and its lack of service and geographical diversification, making it
vulnerable to the weak macroeconomic conditions in Puerto Rico.

LCPR is 60% owned by Liberty Global plc (LG) and 40% owned by
Searchlight Capital Partners, and is a part of the LiLAC Group (LiLAC),
which represents LG’s Latin America and Caribbean operations. The
company benefits from the strategic oversight by LG and its management
expertise, as well as procurement and operating synergies from belonging
to a larger operational group. LiLAC operating entities are separately
capitalized and managed independently and LG maintains a group leverage
target of 4.0x to 5.0x for its subsidiaries. LCPR’s leverage level is
currently aligned with that target. Fitch forecasts the company to
maintain relatively stable leverage based on its operational
fundamentals over the medium term, while any potential material
improvement in the financial profile could be difficult as any
significant deviation from the group’s financial target could be limited.

LCPR’s credit facility and its first-lien term loan are rated same as
the company’s IDR, given their ‘RR4’ recovery ratings which represent
average recovery prospects in case of default. Based on Fitch’s recovery
analysis of the company’s second lien term loan, Fitch assigned a ‘RR6’
recovery rating and the issuance rating of ‘B-‘, indicating below
average recovery prospects in the event of default, which is two notches
lower than the company’s IDR.

Strong Business Position

Fitch expects LCPR’s market leadership to remain intact supported by its
extensive network coverage and quality. LCPR is the leading pay-TV and
broadband services provider in Puerto Rico with market shares of 39% and
53%, respectively. Competitive pressures are high in the broadband and
pay-TV segments, and the fixed-voice service continues to suffer from
the unfavourable industry trend of mobile-fixed substitution. This trend
should continue to limit any material growth in ARPU and operating
margins in the short-to-medium term. Positively, Fitch believes that
LCPR’s competitive advantages should enable the company to maintain its
leading market shares.

Weak Operating Environment

Economic conditions in Puerto Rico continue to be negative for LCPR. The
company’s lack of geographic diversification exposes it to Puerto Rico’s
struggling economy, which is undergoing declining population, low GDP
per capita, and high unemployment rates. Despite the company’s stable
performance in recent years, these factors could begin to erode service
affordability and negatively affect LCPR’s cash flow generation going
forward. Fitch forecasts LCPR’s revenue growth to be in the low single
digits in the short-to- medium term, reflecting the weak macro
environment and a high level of market competition.

Financial Profile Improvement

LCPR’s cash flow from operations (CFFO) has grown consistently in recent
years due to continued expansion of its subscriber base and the
acquisition of Choice. During the LTM ended Sept. 30, 2016, the company
generated CFFO of USD141 million, which favourably compares to the 2015
level of USD113 million and USD80 million in 2014. LCPR’s improving
operational cash flow generation has provided the company with
comfortable headroom to cover its capex, averaging approximately USD65
million annually during 2014 and 2015, and positive FCF generation over
the last two years. Fitch forecasts this trend to continue over the
medium term, with its positive FCF margin in the low-to-mid single
digits.

Fitch forecasts LCPR’s net leverage, measured by total adjusted net debt
to operating EBITDAR, to improve to 4.5x by end-2016, from 5.3x at
end-2015, reflecting the full year EBITDA contribution from Choice and
Fitch’s aforementioned cash flow expectations. The company’s
deleveraging capacity should allow its leverage ratio to gradually
improve further to 4.2x by 2018, barring any sizable shareholder
distributions, the level that is solidly in line with the current rating
level.

DERIVATION SUMMARY

LCPR’s credit weaknesses to its regional peers in the ‘BB’ rating
category are its relatively small scale of operations, lack of
diversified service offerings, and high leverage. In addition, the
company’s operating environment in Puerto Rico, which has undergone
tough economic challenges is also a key credit concern. These weaknesses
are somewhat mitigated by the LCPR’s leading market position and network
competitiveness, which are considered strong for its rating level.
Parent/Subsidiary Linkage is not applicable and the ratings are not
constrained by the country ceiling.

KEY ASSUMPTIONS

Fitch’s key assumptions within the agency’s rating case for the issuer
include:

–Low-single digits revenue growth from 2017 and beyond, following an
over 10% growth rate in 2016;

–Relatively muted EBITDA improvement from 2017 amid slow revenue growth
and intense competition;

–Capital expenditures to remain at about 21% of revenues in the
short-to-medium term;

–No material shareholder distributions;

–Total adjusted net leverage to remain in the range of 4.0x to 4.5x
over the short-to-medium term.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a
negative rating action include:

–Deterioration in operating performance caused by unfavorable
macroeconomic conditions and competitive landscape;

–Sustained negative FCF generation amid higher-than-expected capex
requirement;

–Any material cash flow upstream to LG;

–Adjusted net leverage increasing to above 5.0x on a sustained basis.

Future developments that may, individually or collectively, lead to a
positive rating action include:

–Continued solid top-line growth along with margin expansion, and
positive FCF generation;

–Clear commitment for deleveraging in the absence of any material cash
flow upstream to LG, resulting in its adjusted net leverage falling well
below 4.0x on a sustained basis;

LIQUIDITY

LCPR’s liquidity is sound given its cash balance of USD51.0 million
comfortably covers the short-term debt of USD0.2 million as of Sept. 30,
2016. Fitch does not foresee any liquidity problem for LCPR in the
short-to-medium term as the company does not face any sizable debt
maturities until 2022, when its first lien term loan B becomes due. The
company’s liquidity position is further strengthened by its USD40
million undrawn credit facility.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings.

Liberty Cablevision of Puerto Rico, LLC.

–Long-Term Foreign Currency Issuer-Default Rating (IDR) ‘B+’; Outlook
Stable;

–Senior Secured Revolver ‘B+/RR4’;

–Senior Secured 1st Lien Term Loan B due 2022 ‘B+/RR4’;

–Senior Secured 2nd Lien Term Loan C due 2023 ‘B-/RR6’.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016074

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016074

Endorsement Policy

https://www.fitchratings.com/regulatory

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Director
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or
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or
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