Credit analyst notes uptick in AOL paper but sees little room for more upside

By Ronda Fears

Nashville, Tenn., Sept. 10 - There is little room for more upside in AOL Time Warner Inc. bonds despite the recent rally in response to steps to resolve the fate of its Time Warner Entertainment assets, according to Carol Levenson, director of research at Gimme Credit.

"With the TWE situation well on its way to being resolved, one huge element of event risk has dissipated. Bonds rallied on the TWE news, but we see little additional upside in this name," Levenson said in a report Tuesday.

"Now we can all go back to worrying about the SEC investigation, potential further goodwill writeoffs, and diminished EBITDA."

AOL (Baa1/BBB+) scaled back its guidance for 2002, citing continued weakness in online advertising.

"Before we delve into the new guidance, we think it's only fair to compliment the company on managing to solve the TWE conundrum in a manner that does only minimal credit quality harm," an IPO of the TWE unit, Levenson said.

"Our worst fears, that AOL would end up buying out AT&T for billions in cash, were far from realized.

"While we wouldn't hold our breath waiting for the additional $2.1 billion in debt resulting from this transaction to disappear from AOL's balance sheet, the company does have a plan to pay it down with the proceeds of a cable IPO.

"There's not much of a backup plan if the IPO market proves inhospitable, but presumably AOL could use its free cash flow or sell other noncore assets to eliminate this additional debt burden."

Moreover, results elsewhere in AOL are ongoing concerns, the analyst said.

"The upshot is that online advertising, which has been hurting for some time, is hurting worse than management thought just a month ago," she said.

AOL was boasting on a conference call Monday about what a healthy balance sheet the cable company would have, the better to make acquisitions with, she added. Thus, any debt reduction would likely be temporary and management probably won't be striving for a credit upgrade.

"AOL didn't exactly lower its guidance yesterday, it merely expanded the lower end of its projected range for advertising and commerce revenue this year and, consequently, for EBITDA at its AOL unit," Levenson said.

"However, the possibility of lower-than-expected results at AOL has not caused the company to reduce its companywide EBITDA guidance, yet."

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