Overview

Competitive pressures have intensified for satellite TV provider DISH 
Network Corp., resulting in substantial subscriber losses and leverage 
rising to 6.0x for the 12 months ended Dec. 31, 2017, compared to 
previous expectations of about 5.5x. 
We are lowering all ratings on DISH, including lowering the corporate 
credit rating to 'B' from 'B+', which includes a notch of uplift for the 
optionality provided by spectrum investments held at subsidiaries. 
The negative outlook reflects weakening operating trends, falling EBITDA 
and the potential for leverage to increase above 7.0x to fund DISH's 
wireless ambitions. While we believe certain scenarios surrounding DISH's 
plan to monetize spectrum investments could be credit positive longer 
term, such as a leasing agreement, rating upside is limited over the next 
year. 

Rating Action

On Feb. 26, 2018, S&P Global Ratings lowered its corporate credit rating on 
Englewood, Colo.-based DISH Network Corp. to 'B' from 'B+'. The outlook is 
negative. 

At the same time, we lowered our issue-level ratings on the unsecured debt 
issued by DISH DBS Corp. to 'B' from 'B+'. The recovery rating remains '4', 
indicating our expectation for meaningful (30%-50%; rounded estimate: 45%) 
recovery in the event of a payment default. We also lowered the issue rating 
on DISH's convertible notes to 'CCC+' from 'B-'. The recovery rating remains 
'6', indicating our expectation for negligible (0%-10%; rounded estimate: 0%) 
recovery in the event of a payment default. 

Rationale

The downgrade reflects continued deterioration in DISH's satellite TV business 
stemming from heightened competition, shifting consumer preferences, and 
mature industry conditions that have resulted in weaker credit metrics than 
previously expected. We currently project satellite TV subscriber losses to 
continue at the current rate of about 8%-9% per year, which we do not believe 
can be fully offset by growth in marginally profitable Sling TV subscribers. 
If this trend continues, cash flow generated by the pay-TV assets at DISH DBS 
may not be able to support the current capital structure at DISH Network 
longer-term. Still, there are no near-term liquidity concerns given that Dish 
can meet its maturities in 2018 and 2019 with internal cash generation, so we 
believe DISH has time to execute its strategy of retaining its most profitable 
rural subscribers while growing Sling TV to provide a deleveraging path. 

New technology that no longer requires physical infrastructure to provide a 
nationwide video service has dramatically reduced barriers to entry. As a 
result, DISH faces intense competition from a plethora of new online 
alternatives, in addition to traditional cable companies. Importantly, DISH is 
much more susceptible to cord-cutting trends than are cable companies because 
it lacks a true broadband product that can be bundled with video. Without a 
broadband product, DISH is competing head to head with streaming services that 
can offer customers meaningful savings, whereas competing cable companies can 
increase the standalone price of broadband to reduce the amount of potential 
savings customers may realize from cutting the cord while also preserving much 
of the lost profits from any video service erosion. 

In an attempt to offset satellite TV losses, DISH introduced its own 
live-streaming app, called Sling TV, a few years ago. While Sling TV has 
gained traction in the market with 2.2 million subscribers as of year-end 
2017, it is also one of the cheapest virtual multichannel video program 
distributors (MVPDs) available, which limits profitability. Furthermore, it 
was first to the market and is now facing increasing competition from DirecTV 
Now, Hulu Live, Playstation Vue, YouTube TV, and Philo, among others. Verizon 
and T-Mobile both also plan to join to crowded virtual MVPD universe in 2018, 
which could make it difficult for Sling TV to sustain the pace of growth it 
has experienced over the past year. 
 
We believe it will be difficult for DISH to offset profitable satellite 
subscriber losses with growth in Sling TV subscribers. We estimate, based on 
SNL Kagan data for 2017 average programming costs per channel, DISH's price 
above programming is only $2 per subscription for the Orange package (offered 
at $20 per month) and $3 for Blue ($25). Having said that, DISH likely pays 
below-average programming costs due to its large scale so its profit per 
subscription is probably somewhat higher. This estimate is also before any 
marketing costs, which DISH has been ramping up, as well as potential revenue 
associated with targeted advertising. Even factoring in growth in targeted 
advertising, we believe Sling TV's profitability will remain a fraction of the 
estimated gross profit of around $30 per subscription per month for a 
traditional satellite TV subscriber (before one-time subscriber acquisition 
costs that averaged $751 per gross add in 2017). While Sling TV customers do 
not incur costly installation costs, they are also more likely to churn as 
there are no contracts. 

Our-base-case scenario assumes: 

DISH's performance is affected less by macroeconomic factors and more by 
secular trends including shifting technology and consumer viewing habits 
that we project will result in satellite TV subscriber losses of 8%-9% in 
each of the next two years compared with our expectation for roughly a 3% 
decline in the overall traditional pay-TV universe.
Total pay-TV subscribers will decrease 2.5%-3.0% in each of the next two 
years, as growth in Sling TV partly offsets heavy DISH TV subscriber 
losses. Still, we are projecting growth at Sling TV to decelerate to 
about 30% in 2018 and 20% in 2019 with the ramp-up of new alternatives, 
such as YouTube, Hulu, and DirecTV Now in 2018 and Verizon and T-Mobile 
in 2019.
Pay-TV average revenue per user (ARPU) declines about 1%-2% through 2019 
as lower-priced options such as Sling TV and Flex Pack constitute a 
larger portion of subscribers. Still, we expect the company to raise 
prices to offset rising programming costs to some degree (though this 
could prove challenging in a more competitive marketplace) and Sling TV 
could benefit from targeting advertising opportunities.
Subscriber-related expenses down about 1% in 2018 and 1.5% in 2019 as 
contractual programming rate increases are offset by the mix shift toward 
skinny bundles resulting in gross margins of about 30.5% in 2018 and 29% 
in 2019 from about 33% in 2017.
Subscriber acquisition costs down about 10%-13% per year as gross DISH TV 
additions decline by about 10% per year and the company offers fewer 
promotional discounts. Sling TV customers do not require hardware 
installations, but we do expect increased advertising spending as the 
company competes in a crowded field.
Free operating cash flow (FOCF) used to repay debt maturing over the next 
two years. 

These assumptions result in the following: 

Total revenue down 4%-6% per year through 2019.
EBITDA down 10%-14% per year through 2019 due to an unfavorable mix shift 
in the business.
Debt to EBITDA of around 6.5x through 2019. 
FOCF to debt of 6%-8% in 2018 dropping to about 1%-3% in 2019 as the 
company starts the first phase of its network build. 

We believe the company's wireless strategy is still unclear and announced 
plans to build out a network to satisfy FCC requirements for a portion of the 
spectrum could be designed to buy more time to find a partner or monetize the 
spectrum. While there are scenarios, such as a costly, speculative build-out 
that we would view negatively, we also recognize that other options could 
result in meaningful improvement in DISH's credit profile longer term such as 
a leasing agreement or certain partnership agreements. Therefore, we 
incorporate a notch uplift related to DISH's spectrum investments. 

For a more detailed discussion, please see Credit FAQ: How DISH Network 
Corp.'s Various Wireless Options Could Affect Its Credit Quality, to be 
published shortly.

Our forecast does not include any spectrum purchases over the next two years. 
In January, the FCC granted DISH 90 days to renegotiate its agreement with 
designated entities (of which DISH holds 85% economic ownership) that 
purchased AWS-3 spectrum in a previous auction. The FCC had ruled previously 
that these entities were effectively controlled by DISH, disqualifying them 
for the 25% small business discount, worth about $3.3 billion. If DISH is 
unable to remedy de facto control issues, the FCC will re-auction this 
spectrum. We expect DISH to participate in any re-auction given that it is 
responsible for the difference between $3.3 billion and the winning bid. If 
DISH does spend more money on spectrum purchases, leverage could rise beyond 
our base-case forecast.   

Liquidity

We believe DISH has adequate liquidity to meet operational and financial needs 
over the next year, with sources of liquidity exceeding uses by about 2.3x. 
Still, given that DISH does not operate with a revolving credit facility, we 
believe DISH may need to tap the capital markets to fund its planned network 
buildout as our base-case forecast has cash declining to about $800 million - 
$900 million by the end of 2019 and less than $500 million in 2020. We believe 
DISH has access to capital given unencumbered spectrum assets and significant 
secured debt capacity under its unsecured note indentures issued at DISH DBS. 

Principal liquidity sources:

Cash and short-term investments of about $2 billion as of Dec. 31, 2017
Cash from operations of about $1.5 billion in 2018 and $1.3 billion in 
2019

Principal liquidity uses:

Debt maturities of $1.0 billion in 2018 and $1.4 billion in 2019
Capital expenditures of around $400 million per year, excluding network 
buildout costs
Network buildout costs of up to $1 billion, mostly occurring in 2019

Covenants

There are no financial maintenance covenants, but DISH has incurrence tests 
that limit the amount of indebtedness at DISH DBS to 8x leverage or $1,500 per 
subscriber as well as a limitation on secured leverage of 3.75x. According to 
our calculations, we believe DISH has over $7 billion in secured debt 
capacity. 

Outlook

The negative outlook incorporates the risk that we could lower the rating 
further over the next year if operating trends do not improve or if decisions 
related to DISH's wireless strategy harm DISH's credit profile. 

Downside scenario

We could lower the rating if leverage rises above 7.0x to fund a network 
buildout, or spectrum purchases, without a credible improvement in DISH's 
business profile and earnings generation capabilities. Alternatively, we could 
lower the rating (potentially by more than one notch) if DISH were to sell its 
spectrum assets and use all of the proceeds for shareholder returns, provided 
that fundamentals in the pay-TV business do not improve to allow for a 
deleveraging path.

Upside scenario

We could revise the outlook to stable if DISH improves its satellite TV 
business and continues to grow Sling TV such that leverage were to fall below 
6.0x with a path for further improvement. We believe this is possible if DISH 
can reduce its satellite TV subscriber declines to 4%-5% per year by lowering 
churn to about 1.4%-1.5% per year from 1.78% in 2017. Alternatively, we could 
revise the outlook to stable if DISH inks a wholesale spectrum leasing 
agreement, or other partnership, with a wireless carrier that provides a 
significant and predictable revenue stream with limited investment going 
forward. While this could provide longer-term upside, benefits to DISH's 
financial profile would likely take a few years to materialize as the spectrum 
gets deployed. 

Ratings Score Snapshot

Corporate Credit Rating: B/Negative/--

Business risk: Weak

Country risk: Very low
Industry risk: Intermediate
Competitive position: Weak

Financial risk: Highly Leveraged

Cash flow/Leverage: Highly Leveraged

Anchor: b-

Modifiers

Diversification/Portfolio effect: Neutral (no impact)
Capital structure: Positive (+1 notch)
Financial policy: Neutral (no impact)
Liquidity: Adequate (no impact)
Management and governance: Fair (no impact)
Comparable rating analysis: Neutral (no impact)

Recovery Analysis

Key analytical factors

DISH DBS Corp. is the issuer of the various unsecured notes totaling 
about $14 billion. The notes are guaranteed by the company's principal 
operating subsidiaries on a senior basis. The guarantees rank equally 
with all of the current and future unsecured senior debt of the 
guarantors, and senior to all existing and future subordinated debt of 
the guarantors. The guarantees rank junior to any future secured debt of 
the guarantors to the extent of the value of the assets securing such 
debt. 
The issuer of $4 billion in unsecured convertible notes is holding 
company DISH. These notes are not guaranteed by any subsidiaries, 
including entities that hold spectrum assets. Therefore, the notes are 
structurally subordinated to debt issued at DISH DBS Corp. with regard to 
the assets at DBS. 
Our simulated payment default scenario contemplates that intense 
competition from cable TV, DIRECTV, and telephone companies, as well as 
an accelerated shift to OTT viewing, will make satellite direct-to-home 
digital-TV services less attractive, causing increased churn, lower ARPU, 
and declining profitability. 
We do not assign any value to spectrum within our stressed recovery 
analysis, as these assets reside outside issuing entities. There are no 
contractual commitments that provide creditors any value from these 
assets, which could eventually be sold outright with cash returned to 
shareholders or used to partner with another company at a legal entity 
from which bondholders would lack contractual guarantees.
We apply a 5x multiple to emergence EBITDA, which is a lower multiple 
than for most pay-TV cable companies given DISH's heightened exposure to 
competition from OTT due to the lack of a true broadband hedge.

Simulated default assumptions

Simulated year of default: 2021
EBITDA at emergence: $1.5 billion
EBITDA multiple: 5x

Simplified waterfall

Net enterprise value (after 5% administrative costs): $7.1 billion
Collateral value available to unsecured creditors: $7.1 billion
Senior unsecured notes: $14.5 billion
--Recovery expectation: 30%-50% (rounded estimate: 45%)
Subordinated notes: $4.0 billion
--Recovery expectation: 0%-10% (rounded estimate: 0%)

Related Criteria

General Criteria: Methodology For Linking Long-Term And Short-Term Ratings
, April 7, 2017
Criteria - Corporates - General: Recovery Rating Criteria For 
Speculative-Grade Corporate Issuers, Dec. 7, 2016
Criteria - Corporates - General: Methodology And Assumptions: Liquidity 
Descriptors For Global Corporate Issuers, Dec. 16, 2014
Criteria - Corporates - Industrials: Key Credit Factors For The 
Telecommunications And Cable Industry, June 22, 2014
General Criteria: Group Rating Methodology, Nov. 19, 2013
Criteria - Corporates - General: Corporate Methodology: Ratios And 
Adjustments, Nov. 19, 2013
Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
General Criteria: Country Risk Assessment Methodology And Assumptions, 
Nov. 19, 2013
General Criteria: Methodology: Industry Risk, Nov. 19, 2013
General Criteria: Methodology: Management And Governance Credit Factors 
For Corporate Entities And Insurers, Nov. 13, 2012
General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research

Cord Cutting: An In-Depth Analysis Of The New Alternatives To Cable TV, 
May 17, 2017 

Ratings List

Downgraded; Outlook Action
                                        To                 From
DISH Network Corp.
DISH DBS Corp.
DISH Broadband Corp.
 Corporate Credit Rating                B/Negative/--      B+/Negative/--

Issue Level Ratings Downgraded; Recovery Rating Unchanged
DISH Network Corp.
 Senior Unsecured                       CCC+               B-
   Recovery Rating                      6(0%)              6(0%)

DISH DBS Corp.
 Senior Unsecured                       B                  B+
   Recovery Rating                      4(45%)             4(45%)

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action 
can be found on the S&P Global Ratings' public website at 
www.standardandpoors.com. Use the Ratings search box located in the left 
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