DBRS Confirms DIRECTV Holdings LLC at BBB (low)/BB (high), Trend Remains Positive

DBRS has today confirmed the ratings for the Secured Bank Facility of DIRECTV Holdings LLC (DIRECTV or the Company) and the Senior Notes under DIRECTV Holdings LLC/DIRECTV Financing Company Inc. at BBB (low) and BB (high), respectively. The trend remains Positive.

The Positive trend reflects the DBRS view 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 net free cash flow generation. DBRS expects to fully consider these and other external factors in assessing an improvement in the Company’s ratings in the near to medium term.

DBRS notes that DIRECTV is 39% owned by News Corporation (News Corp.), which has contracted to sell its stake in DIRECTV to Liberty Media Inc. (Liberty). DBRS does not believe that this ownership change has immediate credit implications; however, DBRS notes the possibility that Liberty’s ownership stake and subsequent changes to the DIRECTV’s board may result in a significant change to the Company’s financial policies. Specifically, DBRS is of the opinion that the probability of an increase in leverage at DIRECTV, followed by the commencement of a large share-buyback program, is not insignificant. Should such an event be undertaken, DBRS would review the resulting credit profile and take appropriate ratings action. DBRS wishes to highlight that such an event has the potential to result in negative rating implications.

Potential changes to the company’s financial risk profile notwithstanding, this confirmation reflects the following: (1) an improving business-risk profile with a focus on adding high-value subscribers, growing average revenue per user (ARPU) and stabilizing churn levels, and (2) improved cash flow from operations 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. While subscriber acquisition costs (SAC) per subscriber have increased, total subscriber acquisition costs have declined dramatically under this program. The company is targeting high-value subscribers. Initially, they cost more to acquire because they tend to more-frequently subscribe to multiple-set-top boxes and higher-value digital video recorders (DVRs). However, these high-value subscribers tend to spend more on ancillary offerings and tend not to churn as frequently. DBRS recognizes that the competitive environment for video services in the United States continues to intensify as cable companies retain their video subscribers with successful bundling strategies and as telcos deploy video services on a greater scale throughout 2007. To combat this, DBRS notes 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 largely supports the Company’s high capex spending levels, including investments in satellites. DBRS expects DIRECTV’s key credit metrics will remain strong, provided the Company continues to maintain a focus on keeping a strong balance sheet. However, DBRS acknowledges that this focus could change as a result of the change in the Company’s largest shareholder, further share repurchases, a sizeable broadband investment or a major acquisition.

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