AOL Time Warner Inc. has notified credit rating agencies that its $25.8 billion of debt will increase by several billion dollars in coming months, prompting a warning from Standard & Poor's Corp. that the media giant will face mounting financial pressure and a possible drop in its creditworthiness this year.
In the next few months, the company must add $2.1 billion in debt to restructure the finances of its cable television operations, up to $800 million in debt to purchase an outstanding stake in America Online's European operations and $800 million in debt linked mostly to development of AOL Time Warner Center, the company's new, 53-story Manhattan headquarters.
The company's efforts to reduce its massive debt hinge on raising billions by selling a portion of its cable television operations and other businesses. But analysts said weakness in financial markets, and uncertainty over the prospect of war with Iraq, could complicate or delay those deals. If that happens, the company's creditworthiness would decline, its cost of borrowing would increase and its bond rating would be slashed, analysts said.
The company recently renegotiated the terms of its outstanding loans to avoid any technical violation of existing debt agreements related to its falling net worth, according to Wayne H. Pace, AOL Time Warner's chief financial officer.
Pace emphasized that AOL Time Warner has made reducing its debt to $20 billion by 2004 a top priority. And he said the company does not face an imminent cash crunch, because it has $7.9 billion in available borrowing power from banks and other sources.
"The company is committed to de-leveraging our balance sheet, which will give us the strategic and financial flexibility to better build shareholder value over the long term," spokeswoman Tricia Primrose said yesterday.
Standard & Poor's, a major credit rating agency, said AOL Time Warner's mounting debt means its businesses, ranging from magazines to motion pictures to music, must perform well this year despite a difficult operating environment. S&P also said the company's recent $45 billion non-cash charge, which led to a record annual loss of nearly $100 billion, "mirrors the business risk issues confronting the America Online unit and industry issues for Time Warner cable."
Heather M. Goodchild, an analyst with S&P, said the firm's short-term prospects are clouded by "economic and geopolitical issues," while technology, competition and rising costs threaten future profits. "Deferral of a cable IPO, loss of momentum with other de-leveraging or a weakening of the operating outlook could lead to a downgrade," Goodchild said.
But Neil Begley, senior vice president at Moody's Investors Service, said he remains optimistic that AOL Time Warner will meet its obligations because it has numerous methods for raising cash and top management is focused on debt reduction. He cited the recent sale of its $800 million stake in Hughes Electronics Corp. and the company's continuing ability to throw off excess cash.
"They have a significant amount of cash, well over $1 billion," Begley said. "They are expecting $3 billion in cash flow this year."
The big question is whether they can bring off an initial public offering of stock, he said: "The markets are skittish enough that that will be week-to-week, month-to-month."
Yesterday, MacFarlane Partners in San Francisco announced plans to buy a half-stake in AOL Time Warner Center for up to $859 million from various investors in the project, a transaction that does not affect AOL Time Warner's stake in the real estate. The corporation plans to use 879,000 square feet of office space in the building as its corporate headquarters and production studios for its CNN subsidiary. The structure, on Columbus Circle in New York, will also include a luxury hotel, upscale retail shops, other offices and 191 high-priced condominiums.