Fitch Upgrades Time Warner's Ratings; Outlook Revised to Stable

Thu Apr 4, 2013 3:35pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 04 (Fitch) Fitch Ratings has upgraded the Issuer Default Rating (IDR) assigned to Time Warner Inc. (Time Warner) and its subsidiaries to 'BBB+' from 'BBB'. In addition, the specific senior unsecured issue ratings have also been upgraded to 'BBB+'. The Rating Outlook has been revised to Stable from Positive. A full list of ratings appears at the end of this release. Approximately $19.9 billion of Time Warner's consolidated debt as of Dec. 31, 2012 is affected by Fitch's action. KEY RATING DRIVERS --The business risks attributable to Time Warner's operating profile are consistent with other large media companies and are more reflective of a 'BBB+' rating. --The contemplated spin-off of Time Inc. will benefit the company's operating profile but is not expected to have a material impact on the company's credit profile. --Time Warner's strong portfolio of cable networks anchors the ratings. The rating action incorporates Fitch's view that the business risks and operating profile attributable to Time Warner's credit profile are in line with other large media companies and are more reflective of a 'BBB+' rating. Overall, Fitch's ratings on Time Warner reflect strong and consistent free cash flow (FCF, defined as cash flow from operations less capital expenditures and dividends), solid credit protection measures, sound liquidity, leading market positions in core businesses, and strong content brands. In addition, the company's lower exposure to cyclical advertising revenues relative to its peer group, and lack of exposure to the hyper-cyclical local advertising markets, provides incremental support to the ratings. Fitch does not anticipate any change to Time Warner's financial policy, namely its 2.5x net leverage target or its capital allocation strategy. Fitch believes the company's operating profile and strategies provide the company sufficient capacity at the current ratings. Fitch calculates gross and net leverage of 2.7x and 2.3x, respectively, as of the year ended Dec. 31, 2012, which were relatively unchanged compared with year-end 2011 metrics. Fitch anticipates that over the ratings horizon, Time Warner will issue debt to keep leverage at or near its target as EBITDA grows. Time Warner's capital allocation strategy continues to revolve around investing in its business to strengthen its product portfolio, maintaining a strong balance sheet (2.5x net leverage target) and returning excess capital to its shareholders. Time Warner returned approximately $4.3 billion of capital to its shareholders during 2012 including nearly $3.3 billion of share repurchases. The company maintains an appropriate balance between returning capital to shareholders, in the form of dividends and share repurchases, and investing in the strategic needs of its business in Fitch's estimation. Fitch expects a similar level of shareholder returns during 2013. The stability, recurring revenue, and FCF generation of the cable networks underpin Time Warner's ratings. This business sector derives more than 72% of the company's consolidated EBITDA generation. Fitch expects mid-single-digit top line growth, stable margins and high free cash flow conversion over the next several years, driven by domestic affiliate fee growth and international expansion. The cable networks benefit from long-term affiliation contracts with multi-channel video programming distributors (MVPDs) producing a dual-stream, recurring, high-margin revenue base. The revenue and margin characteristics coupled with low capital intensity yields high FCF conversion. Fitch's ratings incorporate the strong competitive position of Time Warner's film and television studios at Warner Bros. The size and scale of Warner Bros. television studio enables the company to capitalize on strong demand for television content while providing meaningful diversification of revenue sources. Fitch is cognizant of the inherent volatility of hit-driven content in the film and television production business and acknowledges the company's strong track record of consistently generating desirable content. Fitch believes Time Warner's decision to spin off Time Inc. to its shareholders will benefit the company's operating profile but is not expected to have a material impact on the company's credit profile. The proposed transaction, expected to be completed by the end of 2013, enables Time Warner to moderately de-risk its business profile while increasing strategic focus on its Networks, and Film and TV Entertainment segments. Time Warner's publishing segment accounted for 12% of consolidated revenues and 8% of adjusted operating income during 2012. Approximately 53% of the publishing segment's 2012 revenues were derived from advertising. Fitch estimates that pro forma for the Time Inc. spin-off, advertising revenues would account for approximately 17% of 2012 consolidated revenues (down from 21% actual). On a pro forma basis (adjusting EBITDA for the contemplated spin-off of Time Inc.), Time Warner's consolidated leverage was 2.96x (2.5x net) as of Dec. 31, 2012 versus 2.71x (2.32x net debt) actual. Outside of a change to Time Warner's financial strategy or event-driven merger and acquisition activity, rating concerns center on the company's ability to balance escalating programming expense and production costs with the requirement to consistently deliver programming that drives incremental share of viewing audience while maintaining or expanding operating margins. It is critical for Time Warner to continue making appropriate programming and production investments, specifically for original programming and sports rights, to maintain its competitive position in an increasingly fragmented market. Additional risks include the company's capacity to adapt to ever-changing media consumption patterns and technology platforms. Other concerns include the company's ability to stabilize its home entertainment business. Fitch continues to believe that Time Warner is well positioned to address the threats and opportunities presented by emerging alternative distribution platforms. Fitch also believes demand for high-quality content remains strong across all major end-markets (broadcast, cable networks and subscription video on demand) 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 distribution platforms and methods of consumption (smartphones, tablets) will continue to drive more demand for Time Warner's content, providing upside. Time Warner's liquidity is strong and supported by $2.8 billion of cash on hand, $5 billion in available credit facilities (nearly all of which was available as of Dec. 31, 2012), and expected FCF generation. Of Time Warner's revolver commitment, $2.5 billion expires on Sept. 27, 2016, and the remaining commitment matures on Dec. 14, 2017. Scheduled maturities are well laddered and consist of $732 billion during 2013 ($432 million matured in January 2013 and was paid with existing cash) and $1 billion during 2015. Time Warner generated approximately $1.8 billion of FCF during 2012 and Fitch expects the company to generate annual FCF in excess of $1.7 billion during the ratings horizon. RATING SENSITIVITIES: Given the rating upgrade, further positive rating actions are not contemplated over the current ratings horizon. That notwithstanding, positive rating action would likely coincide with Time Warner adopting a more conservative financial policy highlighted with a gross leverage target of 2.0x or lower. Meanwhile, Time Warner will need to demonstrate that its operating profile is sustainable amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms. Negative rating actions are more likely to coincide with discretional actions of Time Warner's management including, but not limited to, the company adopting a more aggressive financial strategy or event-driven merger and acquisition activity that drives leverage beyond 3.5x in the absence of a creditable de-leveraging plan. Additionally, negative rating actions could result should Fitch begin to observe a weakening of the company's ability to produce desired film and television content or secure programming on its cable networks that consistently delivers viewing audience ratings, leading to lower subscription fee or adverting revenues. Further, a weakening of Time Warner's competitive position due to its failure to adopt to emerging distribution platforms can lead to negative rating actions. At Dec. 31, 2012, Time Warner had approximately $19.9 billion in outstanding debt, consisting primarily of the following: --$432 million senior unsecured notes due January 2013; --$300 million senior unsecured notes due July 2013; --$1 billion senior unsecured notes due July 2015; --$18 billion senior unsecured notes with maturities from 2016-2042. Fitch upgrades the following with a Stable Outlook: Time Warner Inc. --Long-term IDR to 'BBB+' from 'BBB'; --Senior unsecured revolving credit facility to 'BBB+' from 'BBB'; --Senior unsecured notes and debentures to 'BBB+' from 'BBB'. Time Warner International Finance Limited --Long-term IDR to 'BBB+' from 'BBB'. Fitch affirms the following ratings with a Stable Outlook: Time Warner Inc. --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Time Warner International Finance Limited --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Contact: Primary Analyst David Peterson Senior Director +1-312-368-3177 Fitch Ratings, Inc. 70 W. Madison, Chicago, IL 60602 Secondary Analyst Rolando Larrondo Director +1-212-908-9189 Chairperson Mike Simonton Managing Director +1-312-368-3138 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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