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23 Jun 1998
MOODY'S ASSIGNS B2 TO SENIOR NOTES OF TIME WARNER TELECOM LLC
New York, 06-23-98 -- Moody's Investors Service has assigned a B2 rating to Time Warner Telecom LLC's (TWT) proposed $400 million senior notes due 2008. The ratings recognize the potential structural subordination of the notes; the company's cash flow development stage with EBITDA break-even expected within a year; and the expectation of additional network construction. Although the company has built a substantial network, the development of the customer base is still at an early stage. The rating also recognizes a management which is appropriately focused on building the customer base, an unusually low financial leverage and strategic owners who provide significant value.
MediaOne (formerly US West) and Time Warner founded the company in 1993, with a plan to provide residential customers with telephone service, which could be bundled with their existing cable offering. Moody's believes that given uncertain prospects for that plan after a significant amount of capital had been invested, in late 1996 the parent companies redirected the telephone assets. The company built a new plan focusing on the business market. New management was installed, capital expenditures were reduced and additional financial support came in the form of loans rather than equity.
Now the company has a substantial network in 19 markets, a sound business strategy and the management and sales staff to execute that strategy. However, the development of the customer base to date, with approximately 24,000 access lines, is at a very early stage. Further, with most of its 16 switches just installed last year, the company's mix of revenues is still heavily concentrated in private lines service rather than switched services. Given the network currently in place and the company's focus on sales, we expect substantial revenue growth this year.
Time Warner, MediaOne and Advance/Newhouse are strategically important to TWT and hold ownership positions of 62%, 19% and 19% in TWT, respectively. Along with the Time Warner brand name, in areas where TW Cable operates, TWT has acquired the right to use certain fiber, rights-of-way and office space from TW Cable, which has allowed TWT to quickly enter new markets at a lower cost. These original shareholders contributed $555 million in equity to the development of TWT, along with a loan which has grown to approximately $160 million since mid-1997.
The proceeds from the debt issue will fund future capital expenditures. We estimate that the company will generate positive cash flow (measured on an EBITDA basis) late this year or early next year. Still, growth of cash flow is likely to be muted by the company's construction of additional networks. New networks generally take two to three years to generate positive cash flow. The company's financial position is strong relative to other companies in this rating class. With $555 million in contributed equity, debt equals 47% of the capital structure. Senior debt is 33%.
The partner note, which is expected to reach approximately $160 million, will become subordinated to the senior notes and will have a tenor in excess of the senior notes. However, the partner note will reserve the right to be repaid by the proceeds from a planned common equity issue.
The ratings on the notes recognize the potential to be structurally subordinated. The notes are unsecured obligations of the holding company. The indenture allows for significant additional debt to be issued at the operating companies and at the holding company. A significant amount may also be secured. Given the existing business plan, Moody's expects additional funding to be required in 2000 to support capital expenditures and the cash operating needs of the newer networks. While the capital expenditures are largely tied to the company's successful growth, we also recognize the possibility for the company to expand faster than currently contemplated.
Time Warner Telecom LLC is headquartered in Greenwood Village, Colorado. The company operates in 19 mostly second tier markets, serving medium to large sized business customers.
No Related Data.
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