News Column

Fitch Rates Time Warner's Proposed Notes Issuance 'BBB+'

May 20, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating to Time Warner Inc.'s (Time Warner) proposed issuance of five- 10- and 30-year notes and debentures. The proceeds are expected to be used for general corporate purposes, including share repurchases. Fitch has a 'BBB+' Issuer Default Rating (IDR) for Time Warner. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

The issuance is consistent with Fitch's expectation that Time Warner will gradually increase leverage over the ratings horizon to meet its net leverage target of up to 2.75x. Shareholder returns that exceed free cash flow (FCF) generation are incorporated into current ratings to the extent that leverage remains below Fitch's 3.5x total leverage threshold. Fitch calculates gross and net leverage of 2.5x and 2.1x as of the latest 12 month (LTM) period ended March 31, 2014. Gross and net leverage pro forma for the spin-off of Time Inc. is 2.7x and 2.0x (including $1.4 billion of distributions from Time Inc.). Fitch does not anticipate any change to Time Warner's financial policy, namely its 2.75x net leverage target or its capital allocation strategy. Fitch believes Time Warner's operating profile and strategies provide sufficient capacity at the current ratings.

The notes and debentures will be issued by Time Warner Inc. under the indenture dated March 11, 2010. They will be guaranteed by Time Warner's wholly owned subsidiary Historic TW Inc., a holding company that owns Home Box Office, Inc. (HBO), Turner Broadcasting System, Inc. (TBS), and Warner Bros. Entertainment Inc. (Warner Bros). In addition, HBO and TBS will guarantee Historic TW Inc.'s guarantee of the notes and the debentures. This is the same guarantee structure as other notes and debentures issued since November 2006.

KEY RATING DRIVERS

--Time Warner's consistent financial policy and capital allocation strategy continues to focus on investing in its business while maintaining a strong balance sheet;

--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 profile;

--Time Warner's strong portfolio of cable networks (TBS and HBO) anchors the ratings.

Fitch's ratings on Time Warner reflect strong and consistent 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, Time Warner'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.

Time Warner's capital allocation strategy remains consistent and is centered on investing in its business to strengthen its product portfolio, maintaining a strong balance sheet and returning excess capital to its shareholders. Time Warner returned approximately $1.3 billion of capital to its shareholders during the first quarter of 2014 (1Q'14) and Fitch continues to expect that 2014 total shareholder returns will exceed the $4.8 billion of capital (including $3.7 billion of share repurchases) the company returned to its shareholders during 2013. Fitch believes Time Warner 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.

Time Warner generated approximately $3 billion of FCF (Fitch defines FCF as cash flow from operations less capital expenditures and dividends) during the LTM period ending March 31, 2014 led by a favorable working capital swing, strong revenue, high operating margin, and low capital requirements. Fitch expects the company to generate annual FCF in excess of $2 billion during the ratings horizon. The FCF generation affords the company significant financial flexibility. Fitch acknowledges that the contemplated level of share repurchases is expected to exceed annual FCF generation; however, the company maintains the ability to reduce share repurchases to maximize financial flexibility should the need occur.

Time Warner's operating profile benefits from the stability, recurring dual stream revenue profile, high operating margin and FCF generation characteristics attributable to its cable network business. Key operating strategy within its cable network businesses will be to leverage increased investment in original and sports programming to accelerate domestic affiliate fee revenue growth.

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 Time Warner 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 businesses. Fitch also acknowledges Time Warner's strong track record of consistently generating desirable content.

Fitch remains convinced that Time Warner is well positioned to address the threats and opportunities present in the evolving media landscape, including the growing prominence of alternative distribution platforms, providing sufficient flexibility within the current ratings to accommodate the company's revised leverage target. 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'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 Time Warner's credit profile. The transaction enables Time Warner to moderately de-risk its business profile while increasing strategic focus on its TBS, HBO and Warner Bros. segments.

Outside of a material change to its financial strategy or event-driven merger and acquisition activity, rating concerns center on Time Warner'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.

Time Warner's liquidity is strong and supported by $3.5 billion of cash on hand, $5 billion in available credit facilities (nearly all of which was available as of March 31, 2014), and expected FCF generation. Time Warner's revolver commitments mature on Dec. 18, 2018. Time Warner has no debt scheduled to mature during 2014 and $1 billion during 2015.

RATING SENSITIVITIES:

Fitch does not contemplate additional positive rating actions over the current ratings horizon. That notwithstanding, positive rating action would likely coincide with Time Warner adopting a more conservative financial policy. 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 Time Warner'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 advertising revenues. Further, a weakening of Time Warner's competitive position due to its failure to adopt to emerging distribution platforms could prompt Fitch to take negative rating actions.

Fitch currently rates Time Warner as follows with a Stable Outlook:

Time Warner Inc.

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--Senior unsecured revolving credit facility at 'BBB+';

--Senior unsecured notes and debentures at 'BBB+';

--Commercial paper at 'F2'.

Time Warner International Finance Limited

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830978

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

David Peterson, +1 312-368-3177

Senior Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Rolando Larrondo, +1 212-908-9189

Senior Director

or

Committee Chairperson

Michael Weaver, +1 312-368-3156

Managing Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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