DBRS Assigns BB Issuer Rating, Upgrades EchoStar DBS to BB (high)

DBRS has today assigned a BB Issuer Rating to DISH Network Corporation’s (DISH or the Company – formerly EchoStar Communications Corporation) wholly-owned subsidiary, EchoStar DBS Corporation (EchoStar DBS). Additionally, DBRS has assigned recovery ratings and instrument ratings to EchoStar DBS’s Senior Unsecured Notes of RR3/BB (high), and to DISH’s Convertible Subordinated Debt of RR6/B (high). The trends are Stable. The recovery ratings and the change in the instrument ratings are a result of the application of DBRS’s Leveraged Finance rating methodology (see press release dated June 9, 2008).

The BB Issuer Rating is the same as EchoStar DBS’s previous implied Issuer Rating of BB. While DBRS previously had DISH’s ratings on a Positive trend, DBRS expects the business risk profile to remain competitive for DISH, which better places EchoStar DBS’s Issuer Rating at BB with a Stable trend.

Cable operators and increasingly, the telcos, are competing for video subscribers as a part of a service bundling strategy. Furthermore, with the loss of AT&T Inc. as a resale partner after its current agreement expires at the end of January 2009, gross subscriber additions could be pressured should DISH not be able to replace the benefits from this partnership (DBRS notes that DISH recently renewed a bundling and distribution agreement with Frontier Communications). As a result, DBRS expects churn levels to remain elevated while DISH seeks to tackle piracy and strengthen its distribution channels. Both cable and satellite operators are pursuing subscribers that could be persuaded to choose satellite (or cable if available) as part of the digital over the air conversion scheduled for February 2009.

The BB Issuer Rating is supported by: (1) scale benefits; (2) good profitability with EBITDA margins trending above 26%; and (3) healthy free cash flow of $1 billion for the latest period and strong credit metrics.

Provided that DISH can manage to keep its monthly churn levels below 2.0% per month (on an annual basis), DBRS expects that higher ARPU from its existing subscribers should be able to offset lower subscriber growth rates or possibly stable subscriber levels. DBRS does note that slower subscriber growth does benefit DISH in terms of enhancing its free cash flow as gross additions are expensive. However, DBRS does caution that significant negative subscriber growth would begin to erode the scale and profitability benefits the Company has achieved over the past five years. DBRS expects EBITDA to reach $3.2 billion for 2008 and $3.5 billion for 2009.

From a financial perspective, DBRS expects DISH to remain a good free cash flow generator of at least $1.0 billion or more each year, which should continue to give it ample flexibility to make additional investments or repurchase shares without significantly altering its reasonable financial risk profile. As such and assuming debt levels return to around $6.0 billion in 2009, DBRS expects DISH’s key credit metrics to remain strong with gross debt-to-EBITDA around 2.0 times and cash flow-to-debt between 0.35 times to 0.40 times.

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