Fitch Affirms Time Warner's (TWX) IDR at 'BBB'; Outlook Stable; Comments on Event Risk Regarding AOL

May 22, 2009 3:52 PM EDT

Fitch Ratings has affirmed Time Warner Inc.'s (NYSE: TWX) Issuer Default Rating (IDR) and debt ratings as follows: Long-term IDR at 'BBB'; Short-term IDR at 'F2'; Senior unsecured at 'BBB'; Commercial paper at 'F2'.

In addition, Fitch affirms the ratings of TWX's subsidiary Time Warner International Finance Limited (formerly AOL Time Warner Finance Ireland) as follows:

--Short-term IDR at 'F2'; Commercial paper at 'F2'.

The Rating Outlook is Stable. Approximately $17 billion in total debt is affected.

Fitch's ratings reflect:

The company's solid and consistent free cash flow; Conservative financial policies and solid credit protection measures; Strong liquidity; and Good market positions in core businesses and strong content brands.

Rating concerns center on:

Execution and event risk regarding AOL; Cyclical and secular pressures facing the company's publishing division; Volatility of the filmed entertainment and television production businesses and maturation of the DVD business.

Fitch continues to believe that the AOL division is the most likely candidate for strategic action over the next twelve months. Through public statements by management, the separation of access from advertising, the over-haul of the leadership team and solicitation (and acceptance) of consents within its debt covenants, Fitch believes management adequately signaled its intentions to separate this division in some type of potential transaction. The absence of future AOL OIBDA is not a material concern, as a portion of AOL OIBDA comes from the access business which Fitch has viewed to be as a dwindling asset. (The company lost approximately 600,000 subscribers last quarter and over two million in 2008.)

Also, Fitch is uncertain regarding the long-term sustainable level for the publishing division's ad revenue stream. This segment faces the same secular challenges plaguing other traditional advertising mediums. Overall, the consumer magazine industry still commands a significant but shrinking share of the overall advertising market, and Fitch expects it to continue to cede share of spending as advertisers continue to experiment with and become more comfortable with emerging and alternative mediums (online banner/search, social networking, mobile, cinema, video game, etc.). Publishing revenues (15% of total) were down 7% in 2008 and down 23% in the first quarter of 2009, while OIBDA was down 29% and 92%, respectively, as cost cuts were not sufficient to offset revenue pressure. OIBDA margins are still decent at 14% on a latest twelve months (LTM) basis, but if 1Q'09 performance persists the division will be challenged to remain above OIBDA breakeven. With limited catalysts for growth in the core print product, Fitch is cognizant of potential execution and event risk related to broader strategic actions related to the publishing division over the next several years.

TWX generated theatrical and television home entertainment revenue of approximately $3.3 billion and $800 million, respectively in 2008. While not a near-term concern in TWX's operating performance, the DVD market, in general, has exhibited some signs of weakness in 4Q'08 and 1Q'09. While predominantly cyclical in the near-term, Fitch believes there are also secular issues that create some uncertainty regarding the sustainable level of home entertainment cash flow generation going forward. As a whole, Fitch recognizes the filmed entertainment division is diversified (movie, TV and games) and the company has taken strides to offset some of the risks through anti-piracy efforts and Video On Demand initiatives. Also, offsetting these risks TWX has taken aggressive actions to improve the cost structure of its movie division by folding New Line Cinema into Warner Bros. and closing down two independent studios (Warner Independent Pictures and Picturehouse). The Warner Bros. studio has also reduced the size of its film slate, thereby reducing variable costs. Fitch believes these actions emphasize management's willingness to make difficult cost cuts in the face of some uncertainty in this unit.

Time Warner Inc. (Time Warner) is a media and entertainment company. [SM]

Related Categories

Analyst Comments

Stocks Mentioned

Related Entities

• Fitch Ratings

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?