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Rating Action:

MOODY'S UPGRADES THE DEBT RATINGS OF AMERICA ONLINE INC., TIME WARNER INC. AND TIME WARNER ENTERTAINMENT, L.P. TO Baa1 (SENIOR UNSECURED)

18 Dec 2000
MOODY'S UPGRADES THE DEBT RATINGS OF AMERICA ONLINE INC., TIME WARNER INC. AND TIME WARNER ENTERTAINMENT, L.P. TO Baa1 (SENIOR UNSECURED)

Approximately $21.8 Billion of Debt Securities Affected.

New York, December 18, 2000 -- Moody's Investors Service has raised the ratings of America Online, Inc. (AOL), Time Warner Inc. (TWI), and Time Warner Entertainment, L.P. (TWE) to Baa1 (senior unsecured), concluding the review for upgrade initiated January 11, 2000, when AOL and TWI announced their intention to merge via a tax free stock swap. The upgrades anticipate the successful closing of the transaction, without material regulatory changes that could impact the companies' credit profile imposed by the Federal Communications Commission, which has yet to approve the transaction. The merger is expected to close by year end or by early January.

The upgrade of AOL's debt ratings reflects the significant benefits gained from the merger, including the credit strength and stability of TWI/TWE, the content richness within many of TWI's and TWE's operating units, the significantly increased scale and diversification, and broadband capability in a portion of the US from TWI/TWE's cable operations. Moody's expects that the company will provide cross guarantees between AOL, and the TWI group of companies (not including TWE) thereby eliminating any potential for structural subordination between the merged companies, and creating a diverse portfolio to reduce risk for each of the companies' respective bondholders. The merger mitigates some concerns that overshadowed AOL's ratings in the past. They included the uncertainty about AOL's ability to compete in an environment where telecommunications and cable providers were aggressively upgrading their networks to offer a high-speed Internet access alternatives which could compete and cut into AOL's subscriber base. AOL was reliant upon striking commercial relationships with broadband providers as it did not own any network of its own. Now, with the assistance of Time Warner's cable operations, AOL should have a competitive footing in the markets that Time Warner cable serves, but will still be reliant upon other providers in the rest of the US. In addition, Moody's was concerned about AOL's ability to maintain its subscriber fee revenue base in the face of growing competition from less expensive Internet service providers. These revenues, while still important will represent a smaller portion of the combined company's total revenues. The conditions placed on the company by the Federal Trade Commission, such as ensuring that AOL continues to support DSL access within Time Warner Cable operating areas, open access to other Internet service providers (at least three) for Time Warner Cable, and non-interference with other interactive TV service providers over Time Warner Cable's network may constrain the opportunities for the company. However, as stated in a research report regarding DSL and cable modem high-speed-access published in May 1999, Moody's anticipated open access to cable systems to occur for competitive reasons by 2002 anyway, and therefore had already addressed such issues in our industry assumptions and factored the impact into our rating assessments.

The upgrade of TWE's and particularly TWI's long term debt ratings reflect each company's continued credit profile improvements, as had been indicated by the change in rating outlook to positive in 1999, prior to the merger announcement. However, with the merger of TWI with a significantly less leveraged AOL, financial credit improvement will be accelerated. Upon the close of the transaction, AOL Time Warner will possess significant financial flexibility as its pro forma leverage ratio will be about 2.0 times. The improved financial profile together with the company's leading brands such as CNN, Warner Bros., People, Sports Illustrated, Fortune, Time, HBO, Warner Music, TBS, and TNT among many others, equates to a very powerful media enterprise. There is no longer a material difference in the credit profile of TWI and TWE as leverage for each of them are similar and both possess significant operating units. Therefore the ratings have been equalized.

From an operational perspective the combination with AOL is expected to provide new growth opportunities as TWI/TWE's business units cross promote and sell their leading product brands with the help of AOL's industry leading Internet subscriber base. In areas such as music, and in the future, films and other studio entertainment, there exist great challenges as distribution evolves with the spread of high speed Internet connections. With AOL, TWI/TWE can lead in finding new ways to embrace Internet distribution of valuable copyrighted intellectual property. The combination with AOL should catapult TWI/TWE to the head of the pack of media participants and Internet leaders as it seeks to exploit the very strong Time Warner franchises with the leading Internet access company in the US.

Moody's believes that the company will continue to experience cash flow growth. This is despite the prospect of an economic slow down and the company's moderate dependence on advertising to support revenue and cashflow growth. Segments such as AOL and cable systems should experience significant growth as new products are made available as they continue to have heavy dependence on non-cyclical subscriber fees and make up more than half the combined company's cashflows. The theatrical and television studio production business and library, normally considered an inherently volatile business, benefits from a significant syndication backlog which should continue for the intermediate-term. Though the segment could be challenged as the buyers of the programming are affected by sluggish advertising growth and a continuing of fragmentation experienced in recent years. The company's music segment has experienced cash flow volatility primarily due to a challenging retail environment, inconsistent artist product delivery, a competitive global environment, increasing costs, and a slow if not uncertain transition to new delivery mechanisms (compact discs to DVD and the Internet). Despite these factors, the segment remains highly profitable with healthy returns on capital. TWI's very strong magazine franchises operate in a competitive landscape, however, they command a disproportionate share of the industry revenues and profits. This factor mitigates some of the negative impact on cash flow that could occur from advertising contraction during an economic downturn as there would likely be a flight to quality to brands such as Time, People, Fortune and Sports Illustrated among others.

Moody's expects that the new company will also drive growth through acquisition and investment. Much of that growth will likely be international in focus and be funded with the increase in financial flexibility. Moody's anticipates that management will maintain leverage of about 3.0 times on average, rather than at the pro forma less than 2.0 times at closing. Broadened financial flexibility at the new rating levels will be driven by growing EBITDA and free cashflow, rather than any debt reduction. Moody's believes that the company will seek to utilize the increase in financial flexibility, by spending cash on hand and potentially growing absolute debt levels significantly to make acquisitions, investments and repurchase its stock. Much higher debt levels could cause additional risk, however, we expect that the company will tap many different debt capital markets available to AOL Time Warner which should enable the company to maintain ample liquidity. In addition, the company has discretion to reduce its capital spending for acquisitions and stock repurchases assuming it can foresee a more challenging operating climate.

The upgraded ratings are listed as follows:

America Online, Inc.:

Issuer rating raised to Baa1 from Ba1;

Senior unsecured shelf raised to (P)Baa1 from (P)Ba1;

Subordinated notes raised to Baa2 from Ba3;

Subordinated shelf raised to (P)Baa2 from (P)Ba3;

Preferred shelf raised to (P)"baa2" from (P)"ba3".

Time Warner Inc.:

Senior unsecured notes and debentures raised to Baa1 from Baa3;

Senior unsecured shelf raised to (P) Baa1 from (P)Baa3.

Time Warner Companies, Inc.:

Senior unsecured notes and debentures raised to Baa1 from Baa3;

Turner Broadcasting System, Inc.:

Senior unsecured notes and debentures raised to Baa1 from Baa3;

Time Warner Capital I (guaranteed by TWI):

Preferred stock raised to "baa2" from "ba2".

Time Warner Pass-Through Asset Trust 1997-1 (guaranteed by TWI):

Senior unsecured notes raised to Baa1 from Baa3.

Time Warner Entertainment Company, L.P.:

Senior unsecured notes and debentures raised to Baa1 from Baa2;

Senior unsecured shelf raised to (P) Baa1 from (P)Baa2;

The Prime-2 commercial paper rating for Time Warner Entertainment L.P. was not included within the review. The rating outlook for all the aforementioned ratings is stable.

America Online, Inc., with its headquarters in Dulles, Virginia, is a global interactive communications and services medium.

Time Warner Inc. and its wholly owned subsidiaries, Time Warner Companies, Inc., and Turner Broadcasting System, Inc., and it's approximately 75% owned subsidiary Time Warner Entertainment, L.P., with their headquarters in New York, New York, are a global diversified media and entertainment company, with interests in cable television systems, cable television networks, magazine and book publishing, recorded music and music publishing, television and filmed entertainment production and libraries, theme parks, and professional sports teams.

New York
Neil Begley, CPA
VP - Senior Credit Officer
Media, Telecom & Technology Grp.
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Robert Konefal
Managing Director
Media, Telecom & Technology Grp.
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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