DBRS Maintains Time Warner “Under Review with Negative Implications”

Dominion Bond Rating Service (“DBRS”) has today maintained the ratings of Time Warner Inc. (“Time Warner” or the “Company”) and its two separate borrowing groups, Content and Cable, “Under Review with Negative Implications” pending the close of Cable’s acquisition of Adelphia Communications Corporation (“Adelphia”).

DBRS’s review was initiated on Cable on April 21, 2005, following its announcement to jointly acquire Adelphia. Furthermore, a review on the Content group began on November 2, 2005, after its share repurchase program was increased significantly. The Adelphia transaction, which continues to require certain regulatory and creditor approval, along with US$20 billion in share repurchases are expected to lead to significantly higher debt levels at both borrowing groups (debt-to-EBITDA of 3 times). DBRS expects to finalize its ratings on both groups as further certainty is achieved regarding the Adelphia transaction. Currently, DBRS expects the ratings on both Content and Cable to be lowered (based on expected higher leverage at each level) by one rating category should the Adelphia and share repurchase plans be fully executed as currently planned.

DBRS notes that Time Warner continues to drive steady EBITDA levels in its Content group. This group continues to benefit from its diversification, higher rates, increased subscribers in Networks, and lower costs in Filmed Entertainment with fewer big-budget releases over the latest 12 months. However, DBRS notes that this continues to mask a couple of factors. Firstly, AOL continues to experience subscriber erosion, which for the first time in Q1 2006 outpaced cost cutting and advertising growth. DBRS expects this business to continue to face structural changes as Time Warner attempts to transform AOL to an advertising-based model, similar to its peers. Secondly, growth at Publishing remains relatively stagnant given the maturity of this business and as advertising revenue continues to move to the Internet.

Time Warner’s Cable group continues to maintain its strong business risk profile by driving EBITDA growth by bundling its subscribers which continues to drive higher ARPU levels and lower subscriber turnover. Additionally, as a result of the strength of its bundles, Time Warner has roughly 31% and 9% of its subscribers taking two and three services, respectively, and continues to grow its basic subscribers after years of competitive pressure. However, DBRS notes these new services continue to require additional costs that keep Cable’s EBITDA margins below industry-leading levels below the 40% level.

Overall, DBRS believes Time Warner will continue to maintain strong business risk profiles in its Content and Cable borrowing groups despite the structural challenges at AOL. However, these businesses will need to support significantly higher leverage at both groups as a result of nearly US$30 billion of cash requirements expected over the next two years along with an annual dividend of nearly US$1 billion.

Notes:
These ratings are based on public information.
Historic Time Warner Inc., Time Warner Inc., and Turner Broadcasting System, Inc. are issuers under the Content group.
Time Warner Cable Inc. and Time Warner Entertainment Company L.P. are issuers under the Cable group.