Fitch Affirms Time Warner Cable's IDR at 'BBB' on Split; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) assigned to Time Warner Cable, Inc. (TWC) and its indirect wholly owned subsidiary Time Warner Entertainment Co., L.P. Fitch has also affirmed the individual issuer ratings of TWC and its subsidiaries as outlined below. The Rating Outlook is Stable. Approximately $13.5 billion of debt and preferred equity outstanding as of March 31, 2008 is affected.

Fitch's action follows Time Warner, Inc.'s (TWX) announcement that the company intends to distribute TWX's remaining ownership interest in TWC to TWX shareholders in a tax- efficient spin-off, split-off or a combination of both, as discussed in a separate press release also issued today ('Fitch Affirms Time Warner's IDR at 'BBB' on Cable Split; Outlook Stable') that is available on Fitch's web site at www.fitchratings.com.

In conjunction with TWC's separation from TWX, TWC is expected to pay its shareholders a $10.85 billion special dividend. The closing of the separation transaction is subject to, among other things, receipt of regulatory approvals and a tax opinion from the IRS. The separation transaction along with the payment of the special dividend is expected to occur during fourth quarter-2008 (4Q'08).

TWC expects to fund the special dividend with the proceeds from a $1.9 billion draw from its existing revolver and a new one year (with a one year extension upon TWC's request) $9 billion bridge loan. Fitch expects the bridge loan will be refinanced with the net proceeds from senior unsecured debt offerings during the course of 2008 and 2009. In the event that TWC is unable to refinance the bridge facility with permanent financing, TWX has committed to provide TWC a senior unsecured supplemental loan facility of up to $3.5 billion for two years for the repayment of the bridge. The supplemental loan facility, if utilized, along with the bridge loan will rank pari passu with TWC's existing senior unsecured debt. The bridge facility and the supplemental loan facility are expected to contain the same financial covenants that exist within TWC's $6 billion revolving credit facility, principally the 5.0 times (x) maximum leverage covenant.

With today's announcement, Fitch will rate TWC on a stand-alone basis. After considering the additional debt TWC expects to incur to fund the special dividend, TWC's credit protection metrics will be relatively weak within the rating category when the separation transaction closes later in 2008. TWC's leverage metric as of the end of the first quarter was 2.3x; however, Fitch anticipates TWC's leverage will increase to approximately 3.75x by year-end (YE) 2008. Fitch expects that TWC will use a substantial amount of its free cash flow generation to reduce leverage to a level more reflective of the current rating. Fitch believes that TWC is positioned to generate material amounts of free cash flow during the ratings horizon and that by YE 2009, TWC's leverage metric will improve to within the company's longer term target of approximately 3.25x.

Overall, Fitch's ratings for TWC reflect:

--Its size as the second-largest cable multiple systems operator (fourth-largest multi- channel video program distributor) in the United States;

--Strong subscriber clustering profile; and

--The company's growing revenue diversity owing to the success of TWC's 'Triple Play' service offering.

Within the context of escalating competitive pressures, the ratings incorporate Fitch's expectation that the company will continue to generate solid operating metrics, sustainable EBITDA and free cash flow growth over Fitch's rating horizon. The expected turnaround of TWC's Los Angeles and Dallas cable systems will contribute to the company's solid operating performance. From Fitch's perspective, TWC's scale and system clustering provide the company with competitive advantages in terms of driving higher operating efficiencies through its cable plant, taking cost out of customer premise equipment, lowering programming costs, and positioning TWC to develop and enhance its product offerings that can differentiate the company's offering from competition.

Rating concerns center on:

--TWC's ability to maintain its relative competitive position given the changing competitive and economic environment;

--Growing retail revenues beyond its core 'Triple Play' service offering;

--Expanding into the commercial services market;

--Efficiently managing its cable plant bandwidth to maximize desirable high-definition (HD) content; and

--Continuing to balance investing in its business with improving its overall credit profile.

During 1Q'08, TWC's free cash flow generation (cash flow from operations less capital expenditures) increased 19% (year-over-year basis) to approximately $340 million. TWC expects 2008 free cash flow to grow 40% relative to 2007 results. TWC's liquidity position is supported by expected free cash flow generation as well as available borrowings from the company's $6 billion revolver. After considering the funding for the special dividend, Fitch anticipates that TWC will have in excess of $2 billion of capacity under its revolver as of YE 2008, increasing thereafter. The company has approximately $600 million of debt scheduled to mature during 2008. Fitch expects TWC to retire the scheduled maturity with free cash flow and proceeds from its revolver. Once the $9 billion bridge loan is refinanced, the company's refinancing risk is minimal as the next material maturity is 2011 when the term loan matures.

The Stable Outlook reflects Fitch's expectation that the company's credit protection metrics will strengthen following the closing of the separation transaction, and that TWC's financial policy will continue to reflect a 'BBB' rating. Additionally, the Stable Outlook also incorporates Fitch's expectation that TWC's operating profile will not materially decline during the near term in the face of competition and slowing economic conditions.

Fitch has affirmed the following ratings:

Time Warner Cable, Inc.

--IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Short Term at 'F2'.

Time Warner Entertainment, LP

--IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

Time Warner NY Cable, LLC

--Mandatory redeemable preferred stock at 'BB+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.