Fitch Upgrades Time Warner's Ratings; Outlook Revised to Stable
CHICAGO -- April 04, 2013
Fitch Ratings has upgraded the Issuer Default Rating (IDR) assigned to Time
Warner Inc. (Time Warner) and its subsidiaries to 'BBB+' from 'BBB'. In
addition, the specific senior unsecured issue ratings have also been upgraded
to 'BBB+'. The Rating Outlook has been revised to Stable from Positive. A full
list of ratings appears at the end of this release. Approximately $19.9
billion of Time Warner's consolidated debt as of Dec. 31, 2012 is affected by
KEY RATING DRIVERS
--The business risks attributable to Time Warner's operating profile are
consistent with other large media companies and are more reflective of a
--The contemplated spin-off of Time Inc. will benefit the company's operating
profile but is not expected to have a material impact on the company's credit
--Time Warner's strong portfolio of cable networks anchors the ratings.
The rating action incorporates Fitch's view that the business risks and
operating profile attributable to Time Warner's credit profile are in line
with other large media companies and are more reflective of a 'BBB+' rating.
Overall, Fitch's ratings on Time Warner reflect strong and consistent free
cash flow (FCF, defined as cash flow from operations less capital expenditures
and dividends), solid credit protection measures, sound liquidity, leading
market positions in core businesses, and strong content brands. In addition,
the company's lower exposure to cyclical advertising revenues relative to its
peer group, and lack of exposure to the hyper-cyclical local advertising
markets, provides incremental support to the ratings.
Fitch does not anticipate any change to Time Warner's financial policy, namely
its 2.5x net leverage target or its capital allocation strategy. Fitch
believes the company's operating profile and strategies provide the company
sufficient capacity at the current ratings. Fitch calculates gross and net
leverage of 2.7x and 2.3x, respectively, as of the year ended Dec. 31, 2012,
which were relatively unchanged compared with year-end 2011 metrics. Fitch
anticipates that over the ratings horizon, Time Warner will issue debt to keep
leverage at or near its target as EBITDA grows.
Time Warner's capital allocation strategy continues to revolve around
investing in its business to strengthen its product portfolio, maintaining a
strong balance sheet (2.5x net leverage target) and returning excess capital
to its shareholders. Time Warner returned approximately $4.3 billion of
capital to its shareholders during 2012 including nearly $3.3 billion of share
repurchases. The company maintains an appropriate balance between returning
capital to shareholders, in the form of dividends and share repurchases, and
investing in the strategic needs of its business in Fitch's estimation. Fitch
expects a similar level of shareholder returns during 2013.
The stability, recurring revenue, and FCF generation of the cable networks
underpin Time Warner's ratings. This business sector derives more than 72% of
the company's consolidated EBITDA generation. Fitch expects mid-single-digit
top line growth, stable margins and high free cash flow conversion over the
next several years, driven by domestic affiliate fee growth and international
expansion. The cable networks benefit from long-term affiliation contracts
with multi-channel video programming distributors (MVPDs) producing a
dual-stream, recurring, high-margin revenue base. The revenue and margin
characteristics coupled with low capital intensity yields high FCF conversion.
Fitch's ratings incorporate the strong competitive position of Time Warner's
film and television studios at Warner Bros. The size and scale of Warner Bros.
television studio enables the company to capitalize on strong demand for
television content while providing meaningful diversification of revenue
sources. Fitch is cognizant of the inherent volatility of hit-driven content
in the film and television production business and acknowledges the company's
strong track record of consistently generating desirable content.
Fitch believes Time Warner's decision to spin off Time Inc. to its
shareholders will benefit the company's operating profile but is not expected
to have a material impact on the company's credit profile. The proposed
transaction, expected to be completed by the end of 2013, enables Time Warner
to moderately de-risk its business profile while increasing strategic focus on
its Networks, and Film and TV Entertainment segments. Time Warner's publishing
segment accounted for 12% of consolidated revenues and 8% of adjusted
operating income during 2012. Approximately 53% of the publishing segment's
2012 revenues were derived from advertising. Fitch estimates that pro forma
for the Time Inc. spin-off, advertising revenues would account for
approximately 17% of 2012 consolidated revenues (down from 21% actual). On a
pro forma basis (adjusting EBITDA for the contemplated spin-off of Time Inc.),
Time Warner's consolidated leverage was 2.96x (2.5x net) as of Dec. 31, 2012
versus 2.71x (2.32x net debt) actual.
Outside of a change to Time Warner's financial strategy or event-driven merger
and acquisition activity, rating concerns center on the company's ability to
balance escalating programming expense and production costs with the
requirement to consistently deliver programming that drives incremental share
of viewing audience while maintaining or expanding operating margins. It is
critical for Time Warner to continue making appropriate programming and
production investments, specifically for original programming and sports
rights, to maintain its competitive position in an increasingly fragmented
market. Additional risks include the company's capacity to adapt to
ever-changing media consumption patterns and technology platforms. Other
concerns include the company's ability to stabilize its home entertainment
Fitch continues to believe that Time Warner is well positioned to address the
threats and opportunities presented by emerging alternative distribution
platforms. Fitch also believes demand for high-quality content remains strong
across all major end-markets (broadcast, cable networks and subscription video
on demand) and that large, well-capitalized content providers, such as Time
Warner, will remain crucial to the industry. Fitch believes Time Warner will
continue to distribute its owned content rationally and with the goal of
maximizing its long-term profitability and franchise value. Further, in
Fitch's opinion the proliferation of new distribution platforms and methods of
consumption (smartphones, tablets) will continue to drive more demand for Time
Warner's content, providing upside.
Time Warner's liquidity is strong and supported by $2.8 billion of cash on
hand, $5 billion in available credit facilities (nearly all of which was
available as of Dec. 31, 2012), and expected FCF generation. Of Time Warner's
revolver commitment, $2.5 billion expires on Sept. 27, 2016, and the remaining
commitment matures on Dec. 14, 2017. Scheduled maturities are well laddered
and consist of $732 billion during 2013 ($432 million matured in January 2013
and was paid with existing cash) and $1 billion during 2015. Time Warner
generated approximately $1.8 billion of FCF during 2012 and Fitch expects the
company to generate annual FCF in excess of $1.7 billion during the ratings
Given the rating upgrade, further positive rating actions are not contemplated
over the current ratings horizon. That notwithstanding, positive rating action
would likely coincide with Time Warner adopting a more conservative financial
policy highlighted with a gross leverage target of 2.0x or lower. Meanwhile,
Time Warner will need to demonstrate that its operating profile is sustainable
amid ongoing competitive pressures, changing media consumption patterns and
evolving technology platforms.
Negative rating actions are more likely to coincide with discretional actions
of Time Warner's management including, but not limited to, the company
adopting a more aggressive financial strategy or event-driven merger and
acquisition activity that drives leverage beyond 3.5x in the absence of a
creditable de-leveraging plan. Additionally, negative rating actions could
result should Fitch begin to observe a weakening of the company's ability to
produce desired film and television content or secure programming on its cable
networks that consistently delivers viewing audience ratings, leading to lower
subscription fee or adverting revenues. Further, a weakening of Time Warner's
competitive position due to its failure to adopt to emerging distribution
platforms can lead to negative rating actions.
At Dec. 31, 2012, Time Warner had approximately $19.9 billion in outstanding
debt, consisting primarily of the following:
--$432 million senior unsecured notes due January 2013;
--$300 million senior unsecured notes due July 2013;
--$1 billion senior unsecured notes due July 2015;
--$18 billion senior unsecured notes with maturities from 2016-2042.
Fitch upgrades the following with a Stable Outlook:
Time Warner Inc.
--Long-term IDR to 'BBB+' from 'BBB';
--Senior unsecured revolving credit facility to 'BBB+' from 'BBB';
--Senior unsecured notes and debentures to 'BBB+' from 'BBB'.
Time Warner International Finance Limited
--Long-term IDR to 'BBB+' from 'BBB'.
Fitch affirms the following ratings with a Stable Outlook:
Time Warner Inc.
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Time Warner International Finance Limited
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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