Fitch Ratings believes Time Warner Cable Inc.'s (TWC) $4 billion share repurchase authorization and 17% dividend increase are consistent with the company's stated financial policies and current ratings. Although management is clearly placing a high priority on shareholder returns and an aggressive cash deployment strategy, TWC's solid free cash flow generation and commitment to leverage targets support the company's 'BBB' issuer default rating (IDR) and Stable Rating Outlook.
The operating leverage inherent in TWC's cable business, along with declining capital intensity, enables the company to generate consistent levels of free cash flow (defined as cash flow from operations less capital expenditures and dividends [FCF]) and provides TWC with significant financial flexibility.
FCF totaled approximately $2.1 billion in 2011. TWC is strongly positioned to continue generating sustainable levels of FCF. However, Fitch anticipates free cash flow generation will be pressured somewhat during 2012 as the benefits associated with past economic stimulus legislation begin to reverse themselves.
Our expectation is that TWC will continue generating material amounts of FCF. Solid cash flow, along with available borrowing capacity from the company's $4 billion revolving credit facility, underpins TWC's strong liquidity position. Year-end cash balances totaled approximately $5.2 billion.
Beyond the company's dividend and capital expenditures, 2012 cash requirements include approximately $3.0 billion related to the acquisition of Insight Communications Company (expected to close during the first half of 2012) and scheduled maturities aggregating approximately $2.1 billion.
TWC's competitive position is strengthened by its increasing revenue diversity, due to the success of its triple-play service offering and better commercial business results. This was highlighted in the solid fourth-quarter 2011 broadband subscriber growth reported today.
CDS spreads have widened 3% over the last three months, notably underperforming the broader U.S. media sector, as concerns over potential market share shifts and a somewhat more aggressive approach to cash deployment have risen. CDS liquidity for TWC has increased as well, trading in the 12th regional percentile, signaling growing market uncertainty over future CDS pricing.
There is flexibility within TWC's current ratings for the company to withstand cyclical headwinds and some pressure on FCF generation over coming quarters. Any negative action would therefore be driven by a fundamental change in financial policies, particularly if management abandons its stated net leverage target of 3.25x.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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