DBRS Assigns BB (low) Issuer Rating and Recovery Ratings to CSC Holdings, Upgrades Cablevision to B

DBRS has today assigned an Issuer Rating of BB (low) to CSC Holdings, Inc. (CSC Holdings) and a BB (low) Issuer Rating to Rainbow National Services LLC (RNS), which are, respectively, direct and indirect wholly owned subsidiaries of Cablevision Systems Corporation (Cablevision). Additionally, based on DBRS’s leveraged finance rating methodology (see the press release dated June 9, 2008), DBRS has assigned recovery ratings to the specific debt securities of CSC Holdings, RNS and Cablevision and upgraded the instrument ratings of CSC Holdings and Cablevision.

Specifically, DBRS recovery ratings and instrument ratings for CSC Holdings are as follows: Senior Secured Credit Facility rated RR1 and upgraded to BBB (low) from BB (low) and Senior Unsecured Notes rated RR2 and upgraded to BB (high) from B (high). DBRS has also assigned Newsday LLC’s Senior Secured Term Loan RR2 and BB (high) ratings given the senior unsecured guarantee from CSC Holdings. Cablevision’s Senior Unsecured Notes were assigned a recovery rating of RR6 and upgraded to B from B (low). DBRS assigned recovery ratings and instrument ratings to RNS as follows: Senior Secured Credit Facility rated RR1 and BBB (low), Senior Unsecured Notes rated RR2 and BB (high) and Senior Subordinated Notes rated RR6 and B. The trends are Stable.

The rating actions remove the ratings of CSC Holdings and Cablevision from Under Review with Developing Implications where they were placed on May 12, 2008, following Cablevision’s announcement that it will acquire 97% of Newsday Media Group (Newsday) from Tribune Company (Tribune). The transaction values Newsday at $632 million, with Tribune also receiving $18 million at closing as prepaid rent for certain operating leases, for a total transaction value of $650 million.

As part of this transaction (which has received customary regulatory approval and is expected to close in the near term), Tribune will contribute its Newsday assets to a new partnership, with Cablevision contributing newly issued Cablevision debt with a fair market value of $650 million at closing. Additionally, Newsday LLC will issue a secured term loan with proceeds paid to Tribune to reduce Tribune’s stake in Newsday to 3%. This Newsday debt will be guaranteed by CSC Holdings. This transaction was preceded by an announcement on May 7, 2008, that Cablevision’s media subsidiary, Rainbow Media Holdings LLC (Rainbow Media), had agreed to acquire the Sundance Channel from General Electric Company, CBS Corporation and Robert Redford for $496 million. This transaction was completed on June 17, 2008.

In light of these transactions, DBRS focused its review on the impact of these acquisitions on the business and financial risk profiles of both CSC Holdings and RNS. While these acquisitions do not directly add to the EBITDA of either of the two borrowing groups (the Restricted Group – that is, the cable operations – or RNS), DBRS believes the incremental debt to undertake these acquisitions does not significantly alter their credit profiles.

DBRS’s BB (low) Issuer Rating for CSC Holdings is supported by the stable business risk profile of its cable business, which exhibits investment-grade characteristics but is constrained by its leverage as it effectively supports the CSC Holdings debt obligations of $10.7 billion and, indirectly, Cablevision’s $1.5 billion of debt. DBRS notes that Cablevision’s incumbent cable franchise generates good EBITDA growth, strong EBITDA margins of 39% and a healthy level of cash flow from operations. DBRS believes that leverage remains high but reasonable at CSC Holdings and its parent, Cablevision, with gross debt-to-EBITDA of 5.0 times currently, or less than 5.5 times on a pro forma basis, including the guarantee from CSC Holdings to Newsday’s prospective $650 million term loan. Furthermore, despite expected heightened competition for Cablevision, DBRS believes that it should be well positioned to defend against the deployment of video and bundled communications services by the telcos. DBRS expects Cablevision’s cable franchise to continue to generate good cash flow from operations to allow it to further invest in subscriber growth and its network, including its recently announced WiFi network deployment plan.

DBRS’s Issuer Rating of BB (low) for RNS is supported by its strong and growing demand for its national cable channels (AMC, IFC and WE: Women’s Entertainment), which generate above-average EBITDA margins of 44% and sizable free cash flow. DBRS notes that while this business on its own may be at the lower end of investment grade, its size, concentration, support of other Rainbow Media businesses and leverage hinder its Issuer Rating. While DBRS notes debt reduction efforts in 2007 reduced leverage to its current level (3.67 times gross debt-to-EBITDA from more than 5.0 times for the previous three years), DBRS estimates that leverage has increased to 4.7 times on a pro forma basis, with RNS paying for a portion of Cablevision’s recent acquisition of Sundance Channel. Despite this additional leverage, DBRS expects good levels of revenue growth going forward, which, in addition to free cash flow, should allow RNS to continue to fund other Rainbow Media businesses (such as its VOOM HD Networks business) and possibly repay its higher debt levels.

At a distressed valuation level, DBRS believes the CSC Holdings Senior Secured Credit Facility (guaranteed and secured by the shares of most of the Restricted Group subsidiaries) has Outstanding prospects for full recovery of 100%. As such, DBRS has assigned this debt a recovery rating of RR1 and an instrument rating of BBB (low), three notches above the CSC Holdings Issuer Rating of BB (low). DBRS notes that even in the worst valuation scenario, where the cable enterprise value plummets by 62% from the current implied enterprise value, the senior secured lenders should experience full recovery.

The CSC Holdings Senior Unsecured Notes has a meaningful residual valuation claim after the secured creditors have been paid. As such, the recovery rating on these unsecured notes is RR2 and assumes a Substantial recovery of 72%. This debt is rated BB (high), two notches above the CSC Holdings BB (low) Issuer Rating.

In terms of the Newsday LLC Senior Secured Term Loan, DBRS has assigned a recovery rating of RR2 as CSC Holdings has provided a senior unsecured guarantee. While the Issuer Rating at this level would not likely be the same as CSC Holdings given the challenging newspaper market and its leverage, DBRS notes that the CSC Holdings guarantee raises this instrument rating to the CSC Holdings senior unsecured rating of BB (high).

The Senior Unsecured Notes of the parent company, Cablevision, have been assigned a recovery rating of RR6 given the Poor recovery prospect of 0%. This debt is rated B, two notches below the CSC Holdings BB (low) Issuer Rating. These notes are “last in line” in the event of default behind all the secured and unsecured CSC Holdings debt.

At a distressed valuation level, DBRS believes the RNS Senior Secured Credit Facility has Outstanding prospects for full recovery of 100%. As such, DBRS has assigned this debt a recovery rating of RR1 and an instrument rating of BBB (low), three notches above the RNS BB (low) Issuer Rating. DBRS notes that even in the worst valuation scenario, where the RNS enterprise value plummets by nearly 70% from the current implied enterprise value, the senior secured lenders should experience a Substantial recovery of 85%.

The RNS Senior Unsecured Notes have a meaningful residual valuation claim after the secured creditors have been paid. As such, the recovery rating on these notes is RR2 and assumes a Substantial recovery of 80.6%. For this reason, this debt is rated BB (high), two notches above the RNS BB (low) Issuer Rating.

Finally, the RNS Senior Subordinated Notes have been assigned a recovery rating of RR6 given the Poor recovery prospect of 0%. This debt is rated B, two notches below the RNS BB (low) Issuer Rating. These notes are “last in line” in the event of default behind all the RNS secured and unsecured debt.

Note:
All figures are in U.S. dollars unless otherwise noted.