Fitch assigns BBB rating to Time Warner Cable's benchmark size, Sterling denominated senior unsecured notes maturing May 2031, citing company's capacity to repurchase shares, maintain dividend policy; outlook stable
May 19, 2011
– Fitch Ratings has assigned a 'BBB' rating to Time Warner Cable, Inc.'s (TWC) benchmark size, Sterling denominated senior unsecured notes maturing May 2031. Proceeds from the offering are expected to be used for general corporate purposes, which may include debt repayment. The notes will be guaranteed by Time Warner Entertainment Company, LP and TW NY Cable Holding, Inc. As of March 31, 2011, TWC had approximately $23.4 billion of total debt outstanding including mandatorily redeemable preferred equity.
Fitch believes that TWC has sufficient capacity within the existing ratings to accommodate the company's $4 billion share repurchase authorization and dividend policy while maintaining the 3.25 times (x) net leverage target. In the absence of any significant acquisition activity, Fitch does not expect any change to the company's long term leverage target and believes that shareholder returns will meaningfully increase during 2011. On a gross debt basis, TWC's leverage for the latest 12 month (LTM) period ending March 31, 2011 was 3.3x. Fitch expects gross leverage to increase modestly as the company manages its liquidity position to address the refinancing of 2012 scheduled maturities totaling approximately $2.1 billion.
Following shareholder returns of over $1 billion during 2010, shareholder returns totaled approximately $998 million during the first quarter of 2011 including $167 million of dividends and $831 million in share repurchases. TWC is on pace to exhaust the remaining share repurchase authority, which totaled approximately $2.7 billion as of March 31, 2011, by the end of 2011. Fitch expects share repurchases during the remainder of 2011 will be funded with existing cash balances (which totaled $3.033 billion as of March 31, 2011) and free cash flow generation.
The operating leverage inherit in TWC's cable business along with moderating capital intensity enable the company to generate consistent levels of free cash flow (defined as cash flow from operations less capital expenditures and dividends) and provide TWC with significant financial flexibility. TWC produced approximately $1.7 billion of free cash flow during 2010. TWC is strongly positioned to continue generating sustainable levels of free cash flow and Fitch anticipates that the company will generate nearly $2 billion (including positive effects of economic stimulus) of free cash flow during 2011.
Further, TWC does not have a maturity scheduled until 2012, when approximately $2.1 billion of debt is scheduled to mature, which enhances the company's overall financial flexibility.
Overall Fitch's ratings reflect TWC's strong competitive position 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 and growing commercial business. Within the context of existing competitive pressures and weak housing formation and employment conditions, 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.
Outside of the company adopting a more aggressive long term leverage target, the weakening of TWC's competitive position presents the greatest concern within TWC's credit profile. The competitive pressure associated with the service overlap among the different telecommunications service providers, while intense, is not expected to materially change during the ratings horizon. TWC's network and the strategies used to maximize the bandwidth capacity of the network provide the basis from which TWC derives its strong competitive position and the flexibility to meet changing market dynamics. Fitch believes that TWC's operating priorities center on its 'TV Everywhere' initiative, enhancing user interface, expanding its broadband service capabilities, and growing its commercial business will enable the company to strengthen its overall competitive position.
TWC's liquidity position is strong and is supported by expected free cash flow generation and available borrowing capacity from TWC's $4 billion revolving credit facility ($3.8 billion available for borrowing as of March 31, 2011 and scheduled to expire November 2013). TWC does not have any scheduled maturities during 2011, however, Fitch notes that approximately $5.7 billion of debt (representing 24% of the outstanding principal amount of debt as of March 31, 2011) is scheduled to mature between 2012 and 2014. Fitch expects that TWC will have sufficient liquidity in place to address its maturity schedule 12 to 18 months in advance of a given maturity.
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