April 5, 2012 / 7:22 PM / 5 years ago

TEXT-Fitch affirms Time Warner ratings

April 5 - Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR)
and all outstanding ratings of Time Warner Inc. (Time Warner) and its
subsidiaries. The Rating Outlook remains Positive. 	
    A full list of ratings appears at the end of this release. 	
	
The Positive Outlook continues to reflect Fitch's belief that the overall risks 	
inherent in Time Warner's businesses and financial policy place the company at 	
the very high end of the 'BBB' rating category, and could potentially warrant 	
'BBB+' ratings over the next 12 months. 	
	
The stability, recurring revenue, and strong free cash flow generation of the 	
cable networks remain the anchor for Time Warner's ratings. The strong expansion	
in both top line and margins in recent years has enhanced the visibility of the 	
company's total revenue base, as well as the overall portion of recurring, 	
high-margin revenue. This business now comprises more than two-thirds of total 	
EBITDA. Fitch expects mid-single digit top line growth and stable margins over 	
the next several years, driven by domestic affiliate fee growth and 	
international expansion. 	
	
The strong position of the Warner Bros. TV studio, lower than peers exposure to 	
cyclical advertising, and lack of exposure to the hyper-cyclical local 	
advertising markets, provide incremental support. Finally, Time Warner's 	
performance during the economic downturn, as well as the speed and magnitude of 	
its recovery, outperformed Fitch's expectations. This highlighted the stability 	
in the Cable Networks and Filmed Entertainment segments and has resulted in 	
Fitch taking a more optimistic view on the overall business. 	
	
Over time, Fitch has grown more comfortable with Time Warner's commitment to its	
stated financial policy and the 2.5 times (x) net leverage target. Fitch 	
estimates gross and net leverage of 2.7 times (x) and 2.3x at Dec. 31, 2011. The	
ratings and positive Outlook incorporate Fitch's expectations that Time Warner 	
will issue debt to keep leverage at or near its target as EBITDA grows. Fitch 	
expects Time Warner to use these proceeds, along with its more than $1.5 billion	
of post dividend free cash flow, for share repurchases and potential moderate 	
acquisitions. 	
	
Fitch's target for current ratings is 0.25 - 0.5x wider than the company's 	
target, providing material operating and financial flexibility at current 	
ratings. Fitch believes these same metrics could warrant a 'BBB+' rating 	
category. While these metrics would be high among 'BBB+' rated credits, Fitch 	
believes the company's size, scale, geographic and product diversity, strength 	
of cable networks, and synergies between its studio and networks business, 	
particularly in a digital media world, could support it. 	
	
Overall, Fitch's ratings on Time Warner continue to reflect strong and 	
consistent free cash flow, solid credit protection measures, sound liquidity, 	
leading market positions in core businesses, and strong content brands. 	
	
Fitch continues to believe that over-the-top (OTT), or Internet-based, 	
television content will not have a material negative impact on Time Warner's 	
credit profile or free cash flow over the intermediate term. Fitch also believes	
consumer demand for high quality, expensively-produced content will continue 	
unabated, and that large, well-capitalized content providers, such as Time 	
Warner, will remain crucial to the industry. Fitch believes Time Warner will 	
continue to distribute its owned content rationally and with the goal of 	
maximizing its long-term profitability and franchise value. Further, in Fitch's 	
opinion the proliferation of new OTT entrants (Amazon, Comcast, etc.) and 	
methods of consumption (smartphones, tablets) will continue to drive more demand	
for Time Warner's content, providing upside. Lastly, the 'TV Everywhere' 	
initiative being undertaken by Time Warner and many of its peers could 	
potentially increase the stickiness of traditional pay TV packages. While 	
premium cable networks are more at risk of customer cancellation due to 	
proliferating alternatives, HBO's compelling original content lineup serves as a	
major mitigant.	
	
Fitch expects spending on production and programming costs, specifically for 	
original programming and sports rights, to continue to increase. It is unknown 	
whether or to what degree this will pressure margins, or if it will be offset by	
top-line growth. Nonetheless, Fitch believes such spending is necessary in order	
to maintain a strong competitive position among increasingly fragmented 	
audiences and proliferating entertainment alternatives. More certainty on 	
Fitch's part that this spending will result in top line growth that enables 	
margin growth, or at least stability, would provide Fitch with incremental 	
comfort for Time Warner and the media industry in general.	
	
Other rating concerns focus on secular challenges facing all media 	
conglomerates. Specifically, concerns include secular pressures facing the 	
company's publishing division and the weak state of the DVD market. Also, while 	
the studio business has meaningful scale and diversity and has been a steady 	
contributor (compared to several peers), Fitch is cognizant of the inherent 	
volatility of hit-driven content in the movie and TV production business. 	
	
The ratings could be upgraded if Fitch concludes that the company's cable 	
networks medium-term growth and margin profile are likely to remain largely 	
unchanged, and that the digital transition will offset physical declines in 	
publishing and DVD sales over the next several years. Fitch does not expect a 	
change in financial policy, but a stronger underlying business with a larger 	
portion of stable cable networks revenue could result in Fitch viewing the 	
current financial policy as warranting higher ratings.	
	
The rating Outlook could be stabilized should Fitch begin to believe that the 	
cable networks will be materially more susceptible to OTT alternatives than 	
currently expected. Further, should the digital initiatives being undertaken at 	
the studio (in home entertainment - electronic rentals and sales; Ultraviolet) 	
and the publishing business (tablets, which is in the earlier stage with a final	
business model not yet determined) fail to provide an offset to the declines in 	
the traditional businesses, ratings could be stabilized. 	
	
At Dec. 31, 2011, Time Warner had approximately $19.5 billion in outstanding 	
debt, consisting primarily of the following: 	
	
--$638 million senior unsecured notes due May 2012; 	
--$432 million senior unsecured notes due January 2013; 	
--$300 million senior unsecured notes due July 2013; 	
--$1 billion senior unsecured notes due July 2015; 	
--$17 billion senior unsecured notes with maturities from 2016-2041. 	
	
Time Warner's liquidity is strong and at Dec. 31, 2011, consisted of 	
approximately $3.5 billion in cash and equivalents and $5 billion in available 	
credit facilities, with $2.5 billion maturing in September 2015 and $2.5 billion	
in September 2016. In addition, Fitch expects the company to generate annual 	
free cash flow (after dividends) in excess of $1.5 billion. 	
	
Fitch affirms the following:	
	
Time Warner Inc.	
--Long-term Issuer Default Rating (IDR) at 'BBB';	
--Short-term IDR at 'F2';	
--Senior unsecured revolving credit facility at 'BBB';	
--Senior unsecured notes and debentures at 'BBB';	
--Commercial paper at 'F2'.	
	
Time Warner International Finance Limited	
--Long-term IDR at 'BBB'	
--Short-term IDR at 'F2';	
--Commercial paper at 'F2'.

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