DBRS Confirms Time Warner Inc. at BBB with Stable Trend

DBRS has today confirmed the ratings of Time Warner Inc. (Time Warner or the Company) and its borrowing subsidiaries (the Content group) at BBB with a Stable trend. On April 30, 2008, DBRS placed the BBB ratings of Time Warner Cable Inc. (TWC), 84% owned by Time Warner, Under Review with Developing Implications following the announcement that TWC planned to borrow $10 billion in incremental debt to pay a one-time dividend prior to being completely spun out to Time Warner’s shareholders. (See the TWC report dated June 23, 2008.)

Time Warner’s ratings continue to remain stable because of its balanced business risk profile, strong free cash flow generation and ample liquidity. DBRS notes that Time Warner continues to benefit from a highly diversified group of cash-generating businesses and to evolve its business model in each of its operating segments. DBRS acknowledges that the Company is transitioning an important element of its AOL segment from a subscriber-based to an advertising-based offering. However, in the context of Time Warner’s total business offerings, DBRS believes this transition does not have an impact on the Company’s overall business risk profile. DBRS notes that Time Warner has communicated that it has formally separated the AOL business to allow it to run its audience business separately from its access business. While this may in time lead to an eventual sale of one or both of these business lines, DBRS will consider these as part of Time Warner’s ongoing business and treat any sale or disposition announcements as an event when and if they occur.

DBRS notes that Time Warner continues to drive significant EBITDA levels from its Content group and generates sufficient free cash flow to allow for shareholder-friendly activities, such as share repurchases and increased dividend payments, while maintaining its stated financial policies with respect to leverage levels.

DBRS notes that in order to maintain its current level of profitability and cash flow from operations, the Company must successfully transition its businesses in the following key areas:

(1) AOL must execute better on its plan to add significant advertising revenue.

(2) Filmed Entertainment must stem reduced revenue and declining margins as the DVD format matures.

(3) Publishing must enhance its online and digital offerings.

DBRS believes the Company’s prospects for success are favourable in these areas, but notes that Time Warner competes in highly competitive businesses against well-established rivals who are equally well funded. Additionally, DBRS notes that such significant transition periods often involve companies disposing of assets deemed non-strategic, which tends to interrupt or prolong execution. Time Warner continues to optimize its portfolio of Content group as it has over the past few years.

Notwithstanding the one-time cash inflow from the TWC dividend, DBRS expects free cash flow for the near term to decline because of these business unit transitions. Although DBRS does not anticipate that Time Warner will incur additional indebtedness, future share repurchases are likely to be completed with cash on hand or from free cash flow. DBRS notes the resulting credit metrics over the next two years are expected to remain stable and be sufficient to preserve the Company’s current rating. Furthermore, DBRS highlights management’s recent commitment to maintaining strong investment-grade ratings.

Notes:
All figures are in U S. dollars unless otherwise noted.
These ratings are based on public information.