DBRS Confirms EchoStar Communications and EchoStar DBS at BB/BB (low), Changes Trends to Positive

DBRS has today confirmed the ratings of EchoStar Communications Corporation (EchoStar or the Company) and EchoStar DBS Corporation at BB (low) and BB, respectively, and has changed the trends to Positive. The Positive trends reflect (1) ongoing subscriber growth and scale benefits, (2) continued increases in profitability as evidenced by expanding EBITDA margins, and (3) increased free cash flow and EBITDA through most of a business cycle.

DBRS expects subscriber growth to continue over the next 18 months, driven by EchoStar’s value proposition, competitive advantages such as its high-definition offering and extensive ethnic programming. While the Company continues to subsidize this growth, it has demonstrated an ability to do so with materially lower subscriber acquisition costs. Acquisition costs are decreasing -- currently $645 per subscriber, down from $693 in 2005, despite higher-value set-top boxes and more multiple-room boxes being deployed. DBRS believes that with churn levels remaining reasonable at slightly below 1.7% per month, the investment in subscriber growth continues to be practical for EchoStar as the Company has been successfully increasing average revenue per user year over year. DBRS recognizes that this strategy could become uneconomic for the Company should churn levels increase above the 2% level. However, DBRS notes the company has been successful in keeping monthly churn relatively stable for several years at approximately 1.5%. Additionally, DBRS does not expect that the spinoff of the technology business will have a material impact on the Company’s overall credit profile. While cash flow from operations continues to improve as a result of this growth, new subscribers are increasingly leasing equipment (treated as capex), which is driving capex levels higher. The Company is now able to redeploy some set-top boxes returned by churning customers at favourable economic terms. This is driving individual subscriber acquisition costs lower, providing some cost stability and resulting in capital intensity modestly decreasing.

DBRS believes EchoStar is improving its competitive position as it competes with its terrestrial cable and telco competitors, as evidenced by its superior subscriber growth. DBRS notes that EchoStar’s service offering reaches remote locations that may not be economically addressed by its cable or fiber competitors’ offerings and therefore expects the Company to experience slightly lower competitive pressures overall. DBRS also notes that EchoStar’s DISH product offers pricing levels 20% lower than its main satellite competitor, DIRECTV, for its entry level basic subscription, making it a preferred provider among more price-sensitive subscribers and providing an overall perception that DISH is a value-based offering.

DBRS notes that while EchoStar operates with greater leverage than DIRECTV, the Company’s debt-to-EBITDA levels have declined to a current level of 2.3 times from a peak of nearly 5 times in 2004.

DBRS expects that EchoStar will continue to increase recurring free cash flow and further expand its subscriber base. This can provide further stability to the Company in periods where capex levels accelerate, typically with the construction and launch of new satellites. This continued improvement will further support an upcoming rating improvement. Additionally, DBRS notes that the expected ratings improvement will occur following the successful completion of the announced spinoff of the Company’s technology business and the confirmation of our assumption that the spinoff will have no material adverse impact on the Company’s overall credit profile.

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.