DBRS Confirms DIRECTV at BBB (low)p and BB (high)p

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of DIRECTV Holdings LLC (“DIRECTV” or the “Company”) and DIRECTV Financing Company Inc. as indicated above.

DIRECTV’s credit profile has shown modest improvements, as the customer base and cash flow continue to grow. There is the potential for improvement in the ratings as the Company reaches a more stable customer base, subscriber acquisition costs decline, and free cash flow becomes significant.

At present, the Company has significant size and a strong business franchise. DIRECTV’s 15 million subscribers, which is an industry-leading number, give it critical mass to gain economies of scale and bargain more effectively with programmers. In addition, the Company continues to reinforce its strong brand and competitive market position with unique programming and outstanding customer service. Distinctive programming is one way the Company can differentiate its service; for example, Latino programming and NFL Sunday Ticket. Also, DIRECTV offers increased functionality. Digital video recorder and interactive capabilities add more value and quality to the consumer’s television experience. Moreover, DIRECTV gives consumers the control they seek over television viewing. Finally, the Company has reduced revenue leakage as piracy is down sharply with leading encryption technology. Hence, financial flexibility remained solid with a strong balance sheet and liquidity of over US$4 billion (at parent DIRECTV Group Inc). As a result, the key business underpinnings to achieve improved profitability are in place.

For the rating to improve, the Company would need to: (1) Generate significant free cash flow and produce EBITDA margins exceeding 35%; DIRECTV has not been able to do either, as subscriber acquisition costs continue to challenge EBITDA. (2) Improve bundling. Direct-to-home operators in the U.S. remain at a competitive disadvantage to cable operators, as they lack the ability to provide Internet or telephony services (multi-product platform), which tend to reduce customer churn and mitigate risk through diversification. (3) Manage its market position. Competition in the pay television market is intensifying, as the market has become more mature and cable operators have enhanced their product offering with digital quality and video on demand. When compared to DTH operators in the U.S., the cable companies have about twice the market share for subscription television. In addition, several telcos are introducing a video product. As a result, DBRS expects DIRECTV’s net subscriber growth rates to ease.

Note:
p - This rating is based on public information.