SOme interesting points to ponder in this Moody's rating
on AOL bond.
-Nat
biz.yahoo.com
Moody's rates America Online proposed notes
(Press release provided by Moody's Investors Service)
Approximately US$ 5.3 Billion of Debt Securities.
NEW YORK, Nov 30 - Moody's Investors Service assigned a Ba3 rating to America
Online's proposed $1.25 billion zero coupon convertible subordinated notes, due 2019.
There will be a put option requiring the company to purchase the notes, in exchange for either cash or AOL stock, at their
accreted value from the holders, exercisable in 2004.
>>>Any idea? <<<<
At the same time, Moody's confirmed its (P)Ba1/(P)Ba3/(P)``ba3' ratings on the remaining availability under America Online's
$4.95 billion omnibus shelf registration capacity for senior debt, subordinated debt, and/or preferred stock, respectively, as well
as
the Ba3 rating on the company's outstanding $256 million 4% convertible subordinated notes, due 2002.
The 4% convertibles, which will be subject to redemption on or after November 14, 2000 at a price of 101.6, may be converted
at any time into shares of common stock at $6.524 per share. The stock closed on Monday at $80 per share.
AOL's senior implied and senior unsecured issuer ratings are Ba1.
The ratings outlook is stable.
The ratings reflect AOL's moderate financial leverage, having been reduced substantially over the past two years as operating
cash flow has increased dramatically.
The ratings additionally recognize the success, to date, of the company's business model, which has benefited from continuous
subscriber growth and a near quadrupling of advertising and online commerce revenues over the same period.
Medium-term operating risks include the potential migration of subscribers to high-speed broadband distribution over cable, for
which the company's access is constrained through at least 2002 by exclusivity provisions in contracts between Excite@Home
and 16 cable providers; and uncertainties over the ramp of digital subscriber line (DSL) service offered over phone lines, which
would provide an alternative high-speed broadband access to AOL subscribers over the interim.
The pricing arrangements and underlying revenue distribution between Internet content providers and the respective broadband
delivery systems could exert downward pressure on the fees AOL currently assesses subscribers for monthly service.
Additionally, in lieu of the DSL rollout, the prospective loss of subscribers opting for the more immediate high-speed broadband
access, to the extent facilitated by Excite@Home in certain service territories, could offset overall subscriber growth or even
possibly erode the subscriber base in the near-term.
Although subscriber fees have been declining proportionately, AOL still derived two-thirds of total net revenues from
subscription services in FY2000Q1.
The ratings also take into account AOL's substantial capital expenditure in telecommunications and server equipment for the
buildout of AOLnet as well as expanding data center capacity.
Although the company expects to fund these investments from a combination of leases, debt financing and cash purchases,
planned capex of $1 billion
could strain free cash flow coverage of fixed charges after imputing the annual accretion on the zero
coupon convertibles.
Additional considerations include
escalating fee arrangements tied to exclusionary partnerships with desktop and mobile
hardware providers; evolving technologies and distribution channels;
competition; litigation; government regulation; and AOL's
ability to continue to manage rapid growth, a more diverse mix of businesses, and global diversification.
Positive considerations include AOL's formidable balance sheet, particularly the company's large and growing cash position,
which could be supplemented by the proceeds from further issuance under the shelf; significant near-term financial flexibility;
strong debt protection implicit in the company's high market valuation; the company's dominant brand recognition; leading market
positions globally; competitive strength in the company's rich Internet content and differentiated services; increasingly diversified
revenue mix; improving cost structure; and seasoned management with a successful record responding to difficult challenges.
Not only are subscribers up, but daily usage has been continually increasing as well. AOL's competitive strengths in the online
services market include its well-known consumer brand-name, strong marketing, ease-of-use, robust and well-organized content,
and ability to produce content through its AOL Studios.
The company's diversification of revenue streams, aided and abetted by a brand differentiation strategy with the addition of the
Compuserve, Netscape and ICQ platforms, has contributed to its enhanced financial profile.
With regard to broadband transmission, the company is constantly in discussions with various cable providers which have
conveyed an interest in distributing the AOL content.
AOL has been successful in negotiated arrangements with wireless providers and, through its strategic alliance with Hughes
Electronics Corporation, will begin marketing AOL Plus to members over Hughes' DirectPC satellite network in 2000.
For the LTM ended September 30, 1999, AOL reported EBITDA of $1.05 billion on net revenues of $5.25 billion, a 200%
increase and 67% increase, respectively, relative to the prior LTM period. EBITDA margin rose to 18.8% from 11.2%.
Dulles, Virginia-based America Online, Inc. is a global interactive communications and services medium. |
