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

Fitch currently rates TWX as follows:

Time Warner Inc. (TWX)

--IDR 'BBB';

--Senior unsecured 'BBB';

--Short-term 'F2'.

TWX announced details today regarding its split of TWC from TWX. Under the proposed transaction, TWX will likely split off TWC sometime in fourth quarter-2008. As part of the transaction, TWC will increase its leverage to approximately 3.75 times (x) full year operating income before depreciation and amortization (OIBDA) and pay a $10.85 billion special dividend to shareholders (including approximately $9.25 billion to TWX). TWC expects to dedicate free cash flow to debt repayment to restore credit metrics to its longer term leverage target of net debt to OIBDA of around 3.25x.

The transaction will initially be funded by $1.9 billion of TWC revolver drawings and a one-year (with an additional one-year extension at TWC's request) $9 billion bridge commitment at TWC. It is expected that the bridge will be termed out in a timely manner, with benchmark-size bond offerings. In the unlikely event that TWC is unable to take out the bridge in the two-year timeframe, TWX has agreed to provide TWC a commitment for a supplemental two-year term loan of up to $3.5 billion to repay the bridge facility at maturity. This supplemental loan would be pari-passu with other senior unsecured borrowings of TWC. This contingent liability is considered in TWX's 'BBB' rating and Stable Outlook. Fitch anticipates that TWX will use the proceeds from the special dividend to invest in the business and return capital to shareholders while maintaining leverage around its 3x net debt to OIBDA target.

As disclosed in prior research, Fitch believes that each entity (TWX and TWC/TWE) has solid 'BBB' category stand-alone ratings, but Fitch has historically linked the ratings for a number of reasons. With today's announcement, Fitch has de-linked the ratings and will rate and cover TWX and TWC/TWE on a stand-alone basis.

Fitch's ratings on stand-alone TWX (ex-cable) reflect:

--The company's solid and consistent free cash flow;

--Solid credit protection measures;

--Sound liquidity; and

--Leading market positions in core businesses and strong content brands.

The Stable Outlook reflects the consideration that TWX is a less-diversified entity, but recognizes that there was significant room in the prior rating. Some of that room has been exhausted, meaning that management's 3.0x target is now more closely aligned with Fitch's expectations for a company with TWX's business risk characteristics. Even with this reduction of diversification, Fitch believes that there is still some room at the 'BBB' rating to absorb some operational shortfalls and debt funded acquisitions or buybacks (presuming 3x leverage can be restored from free cashflow within several periods).

Rating concerns center on:

--Execution risk regarding the company's strategy to drive advertising growth at AOL;

--Secular pressures facing the company's publishing division;

--Its exposure to cyclical advertising; and

--The hit-driven nature of the filmed entertainment and television production businesses.

Also, Fitch recognizes the risk that the transaction announced today may not serve as a catalyst to the stock, which may place pressure on management to execute additional strategic reviews and corporate actions. Fitch believes that potential actions could reduce diversity or negatively affect the longer-term growth profile of the remaining asset base. However, Fitch continues to expect that any potential actions would be contemplated within the context of the 3x net debt-to-OIBDA target (or lower, if growth and diversity were materially negatively affected), as the company's significant debt load provides a meaningful incentive for management to maintain mid-to-high 'BBB' category ratings.

Fitch believes that AOL division is the most likely candidate for strategic action over the next several years. Even as AOL ad growth decelerated in 2007 and early 2008 and underperformed management's and the market's expectations, its shift to an advertising supported model is still viewed by Fitch as prudent. While Fitch has believed that AOL's transition would be a medium-term one and are less concerned with near-term quarterly performance, there is still execution risk related to the shift to an advertising supported model. While it is still relatively early, convincing major advertisers and their media buyers to allocate a more meaningful portion of their online ad spend to AOL has thus far proven challenging. Results from these efforts should become more evident in second half-2008 and in 2009.

TWX (ex-cable) had approximately $23 billion in debt and leverage of approximately 3x (on roughly $7.6 billion in EBITDA) at March 31, 2008. TWX's stand-alone liquidity was solid at March 31, 2008 with strong free cash flow (after dividends), roughly $1.4 billion in cash, and approximately $3.5 billion (excluding letters of credit) in available credit facilities. In addition, Fitch notes that the company supplemented its liquidity in January 2008 with a $2 billion term loan and has $2 billion of public debt coming due in 2009. Most of the company's debt matures in 2011 and thereafter.

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.

Fitch Ratings
Mike Simonton, CFA, 312-368-3138
Jamie Rizzo, CFA, 212-908-0548 (New York)
or
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