DBRS Confirms DIRECTV at BBB (low)/BB (high), Trend Changed to Positive

Dominion Bond Rating Service (DBRS) has today changed the trend on the ratings on the bank debt of DIRECTV Holdings LLC (DIRECTV or the Company) and the senior notes under DIRECTV Holdings LLC/DIRECTV Financing Company Inc. both to Positive from Stable, and confirmed the ratings at BBB (low) and BB (high), respectively. This trend change reflects (1) an improving business risk profile with a focus on adding high-value subscribers, growing ARPU and stabilizing churn levels; and (2) improved free cash flow generation and strong key credit metrics along with relatively stable debt levels.

DBRS notes that DIRECTV has significantly benefited from a more focused subscriber acquisition model beginning in 2005 after it previously pursued an aggressive subscriber growth model, including offering multi-room set-top boxes at $0 price points. By focusing on adding high-value subscribers, total subscriber acquisition and retention costs have declined by 34% year-over-year during the first nine months of 2006. Additionally, DIRECTV has introduced an equipment lease model (March 1, 2006), which is an integral part of its high-value subscriber focus. However, this significantly boosts EBITDA (reported) as the equipment costs are now capitalized versus being fully expensed. Furthermore, churn levels remain stable at 1.6% per month and ARPU continues to grow with subscribers taking higher-value packages along with programming rate increases. As a result, reported EBITDA has grown significantly to nearly $2.8 billion (for the latest 12 months) while adjusted EBITDA (fully expensing equipment and retention costs) has also grown by 41.5% to $2.1 billion.

DBRS expects this focus on high-value subscribers along with low churn will continue in 2007, which will continue to drive EBITDA growth and margin improvement. However, DBRS does recognize that the competitive environment for video services in the United States continues to intensify, with the cable companies winning back some video subscribers with successful bundling strategies and with the telcos expected to deploy video services on a greater scale in 2007. To combat this, DIRECTV has (1) continued to invest in its video service with its deployment of high-definition (HD) channels into local markets in addition to its national HD content; (2) enhanced its distribution channels including its partnerships with certain telcos; and (3) continued to focus on improving its subscriber retention and levels of customer service, which DBRS views as critical.

DIRECTV’s cash flow from operations continues to improve (reported and adjusted), which has helped to support higher capex levels including satellite investments. DBRS expects its key credit metrics to remain strong, provided the Company continues to maintain a focus of keeping a strong balance sheet. However, DBRS does acknowledge that this focus could change should one or more of the following factors change, including its view on a maintaining a strong balance sheet, a change in its largest shareholder, further share repurchases or a sizeable broadband investment.

DBRS believes that DIRECTV has the ability to improve its ratings through further operational improvements underpinned by its focus on high-value subscribers, the maintenance of a reasonable balance sheet and good free cash flow generation. DBRS expects to consider these and the above external factors in assessing an improvement in the Company’s ratings.

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