AOL to avoid "junk" status for now
NEW YORK (Reuters) - For now, AOL Time Warner Inc. and its $27 billion of debt appear unlikely to be consigned to the junk heap.
Standard & Poor's Ratings Services on Wednesday threatened to cut AOL's "BBB-plus" long-term rating one notch on concern the media giant will take on more debt to buy AT&T Corp.'s stake in the companies' Time Warner Entertainment partnership. It affirmed AOL's "Prime-2" short-term rating.
Moody's Investors Service affirmed AOL's equivalent "Baa1" and "Prime-2" long- and short-term ratings, while Fitch Ratings affirmed its equivalent "BBB-plus" long-term rating, all with "negative" outlooks.
All three agencies expect AOL to remain "investment-grade," helped by strong brand names such as CNN, Home Box Office, Sports Illustrated and the Warner Brothers film studio.
This may keep AOL's borrowing costs from soaring, and calmed market fears AOL would follow rival Vivendi Universal into "junk" status and become the next media "fallen angel." Yields on AOL's 10-year notes have fallen nearly 3 percentage points in the last week, and prices have risen about 20 percent.
Moody's Senior Vice President Neil Begley said in an interview that "one of the main differences between AOL and Vivendi is (that) AOL has a fairly solid liquidity profile, so long as it has no material accounting problems."
AOL agreed to pay AT&T $2.1 billion in cash, $1.5 billion in AOL stock and a 21 percent stake in cable systems serving 10.8 million customers, for AT&T's 27.6 percent partnership stake. The buyout would give AOL control of HBO, Warner Brothers and Time Warner Cable.
The Securities and Exchange Commission and Justice Department are probing accounting practices at AOL's America Online unit.
AOL shares on Wednesday surged 97 cents, or 7.3 percent, on the New York Stock Exchange to finish at $14.33, up 97 cents. The shares are still down 55 percent this year.
Traders said AOL's 6.15 percent notes maturing in 2007 rose 4 cents on the dollar to 90.5 cents, driving their yield down to 8.66 percent, while its 6.875 percent notes maturing in 2012 rose 5.5 cents to 90 cents, yielding 8.4 percent.
The 10-year notes were bid at 75 cents, with a yield topping 11 percent, one week ago.
PROBES LEAD TO "UNCERTAINTY"
AOL Chief Financial Officer Wayne Pace said AOL plans to fund the $2.1 billion cash payment with debt from the new cable entity. The company plans to conduct an initial public offering of the new company, which would be known as Time Warner Cable.
S&P analyst Heather Goodchild said in a report that such debt issuance "adds pressure to already weak credit ratios."
Another S&P analyst, Andrew Watt, said the SEC and Justice Department probes into America Online's accounting "contribute to uncertainty" and may undermine the unit's momentum.
Moody's, meanwhile, said AOL's leadership in media and the "content richness of its leading brands" should help it boost cash flow even if debt rises.
Andrew Palmer, who owns AOL bonds among the $1.5 billion he helps invest for ASB Capital Management Inc. in Washington, D.C., said the agencies' actions "reflect some of the increased risks to AOL, but they haven't overacted. The (probes) are enough to raise people's concerns, but the scope doesn't seem as significant as it has been for other fallen angels."
AOL and AT&T, which plans to sell its AT&T Broadband business to Comcast Corp. later this year, expect to unwind the 10-year-old Time Warner partnership in early 2003.
Moody's Begley said, "If it does the IPO and hits its free cash flow targets, which are not aggressive, (AOL's) metrics should move back in line with its current ratings."
Reuters/Variety
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