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04 Nov 2005
MOODY'S PLACES TIME WARNER INC.'S LONG-TERM DEBT RATINGS (Baa1 SR. UNSEC) ON REVIEW FOR POSSIBLE DOWNGRADE
Approximately US$23 Billion of Debt Securities Affected.
New York, November 04, 2005 -- Moody's Investors Service placed Time Warner Inc.'s (TWI)
Baa1 senior unsecured debt ratings on review for possible downgrade following
the company's announcement that it is moving its target leverage
for the consolidated company higher than levels consistent with the current
credit ratings. TWI's Prime-2 short-term rating
is not included within the review. Time Warner Cable Inc.'s
and Time Warner Entertainment LP's (TWC) Baa1 debt ratings remain
on review for possible downgrade due to concerns over the worsening credit
profile resulting from its plan to finance the acquisition of Adelphia's
cable systems substantially with debt.
The review for downgrade reflects Moody's concern that the new leverage
target announced by the company, 3.0x debt to OIBDA,
when adjusted per Moody's standard adjustments, implies leverage
and cash conversion (Moody's calculates conversion after dividends)
for TWI (with TWC deconsolidated) that is not consistent with the 3.0x
adjusted debt-to-EBITDA (consistent with Moody's standard
adjustments) that Moody's has published as consistent with the current
debt ratings. The rating agency will also consider the likelihood
of more shareholder friendly activity than has been announced, which
could occur at the expense of debt investors.
Moody's believes that the company has the financial flexibility,
within the current debt rating, to absorb the larger share repurchase
in the time allotted by management along with the current dividend program.
However, the increased leverage target would allow noticeably higher
leverage at TWI in coming years. Moody's believes that pressure
from equity holders in TWI will continue if the company's stock
price doesn't rise in the near-term. Moody's
does not expect an increase in free cash flow conversion to be sufficient,
given the dividend payout, to permit carrying the higher leverage
target. A drop in the conversion rate is also possible if the company's
tax rate increases as NOLs dissipate over the intermediate term,
and if the dividend rate increases; all such developments would reduce
financial flexibility rather than grow it. Moody's also believes
that such narrowing of financial flexibility around the Baa1 rating to
weather potential economic disruption or weakness in some of its major
operating segments also is reflected in the review for downgrade.
TWI has announced that it has increased its share repurchase program from
$5 billion to $12.5 billion over the next 21 months,
which is in addition to the dividend program instituted this year.
The company has accrued, within the Baa1 rating, significant
financial flexibility at its disposal to meet the announced share repurchase
program increase, both in terms of cash on hand and free cash flow
generation, as well as balance sheet capacity. At this rating
level, Moody's has been comfortable with TWI's leverage
being maintained at or under 3.0x debt-to-EBITDA
(adjusted in accordance with Moody's standard adjustments) so long
as free cash flow conversion of EBITDA remained within the range of 25%
to 35% and free cash flow to debt is within a 10% to 15%
range. The company's new target for the consolidated (TWI
and TWC) company has been raised from a range of 2.25 -
2.75x to about 3.0x. This ratio does not consider
any adjustments that Moody's imputes, which tend to add up
to 0.3x to the reported debt-to-EBITDA leverage calculation.
Since Moody's does not assign credit ratings to the companies on
an accounting reported basis, but rather a legal recourse debt issuer
basis, we deconsolidate the companies to perform our analysis,
though giving credit to TWI for its significant equity interest in TWC.
While Moody's has been concerned that the acquisition of Adelphia's
cable subs, which are expected to be financed largely with debt,
will cause leverage to climb and free cash flow conversion to remain low
at TWC in the near-term to beyond acceptable levels for a capitally
intensive cable company at the Baa1 rating, at least the leverage
metric is expected to decline quickly over the intermediate-term.
Moody's calculates that management's new consolidated target
leverage of 3.0x unadjusted debt-to-OIBDA suggests
a higher leverage level for TWI, and that leverage level,
when adjusted by Moody's is higher than the Baa1 rating can withstand,
particularly as we anticipate that free cash flow conversion will come
under pressure in future years.
Moody's views TWI's debt ratings to be discretionary on the
part of its management. It clearly has the capacity to retain the
current rating or forgo it for a lower rating to appease shareholder demands
in the face of weak share price performance. The long-term
rating would be downgraded if Moody's believes that the company
will increase its share repurchase program above the $12.5
billion over the next 21 months or if it is willing to make debt financed
acquisitions, either of which could raise leverage above 3.0x
(fully adjusted) while its free cash flow conversion of EBITDA is between
25% and 35% and free cash flow-to-debt are
not within the 10% to 15% range. If we expect the
conversion rate to fall below 25% or the free cash flow to debt
ratio falls below 10%, the rating will also be lowered.
Moody's notes that if the conversion rate increases to between 35%
and 45%, the Baa1 rating can tolerate fully adjusted leverage
of 3.25x, and 3.5x if it maintains a conversion rate
above 45%. The debt to free cash flow range in those scenarios
would need to remain in the 10% to 15% range. Also,
if TWI enters into a strategic agreement for its AOL segment that structurally
subordinates TWI debt holders or does not provide strategic benefits,
presumably hastening the transition of that business, that outweigh
the lost asset value and cash flow supporting the bonds, there may
be additional rating pressure.
Time Warner, Inc. and its combined 79% owned subsidiary
Time Warner Cable Inc. and Entertainment L.P.,
with their headquarters in New York City, New York, together
are a global diversified media and communications company, with
interests in interactive communications and services, cable television
systems, cable television networks, magazine and book publishing,
and television and filmed entertainment production and libraries.
Senior Vice President
Media & Telecom Group
Moody's Investors Service
Media & Telecom Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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