AOL Time Warner is currently beefing up its structured finance presence and hiring senior ABS professionals in an attempt to further tap the securitization markets, find lower-cost financing options and diversify its sources of capital.
The media and communications giant is seriously exploring asset securitization options, sources said, and is looking for structured finance managers to arrange, negotiate and structure new financing programs as well as oversee existing programs. Time Warner had a pre-existing asset securitization program before it merged with AOL, including a $500 million securitization facility backed by various licensing fees as well as the company's filmed entertainment backlog.
According to company reports from Time Warner, as of March 31, 2000, including cash received under the securitization facility and other advanced payments, approximately $600 million of cash licensing fees had been collected against TW's and Warner Bros.' backlog.
While the company would only confirm that it is seeking structured finance professionals, observers are not surprised by its probable foray into the broader ABS world, and say that AOL Time Warner's backlog has significant off-balance sheet asset value as a source of future funding.
Moreover, just as the company was getting the word out that it is looking for a structured finance manager, it issued a press release last Wednesday announcing its plans to offer an aggregate of $3 billion of debt securities with maturities of five, 10 and 30 years. It is not clear whether any of that is asset-backed, but the proceeds of the offering will be used to pay down short-term bank debt and "other general corporate purposes."
Even more interesting, last week Moody's Investors Service and Standard & Poor's assigned commercial paper ratings to AOL Time Warner's $5 billion commercial paper program for the first time. Moody's gave the CP a P-2 rating, while S&P gave it an A-2 rating. This rating is not for ABCP specifically, but an analyst confirmed that AOL Time Warner has been an issuer into the ABCP market in the past. "They issue their own CP, and they fund their working capital doing that." Ninety-five percent of all ABCP has a P-1 rating, but in addition to the cost of starting an ABCP program, it is more cost-effective to issue their own P-2 paper, the analyst noted. Still, companies like AOL Time Warner issue ABCP for balance sheet management.
"Considering the merged company's size and scale, it is developing its plans to grow business and maintain leverage, so it doesn't surprise me to hear that they are further accessing the securitization markets," said a rating agency analyst familiar with the company. "It is in the midst of growing debt and it needs to diversify, so securitization gives them lower borrowing costs, lower-cost financing and diversification of capital.
"As commercial banks and buyside institutional investors have their fill of the corporate paper, this is a way for the company to diversify their sources of debt and get higher pricing for it."
According to the analyst, the option of securitization for huge conglomerates such as AOL Time Warner is simply viewed as a cheaper or alternate form of financing, and does not substantially reduce the company's risk, despite its off-balance-sheet advantages.
Initially, corporate issuers feel that non-recourse ABS debt doesn't go into the company's credit matrix, and in order to get a rating higher than that of the servicer, a company such as AOL Time Warner will overcollateralize, and actually take on an added layer of risk. This way, it can keep rolling assets into the portfolio or buy the riskiest layer.
Media companies have recently discussed the option of securitization extensively with the rating agencies, sources said.
While corporate debt analysts seem to view asset-backed debt as an alternative market for companies such as AOL Time Warner, they are inclined to be in favor of it as a diversification of capital sources.
"It also shows that the company will be liquid," another analyst noted.
Assets galore
The most well known Time Warner securitization was for subsidiary New Line Cinema in 1999. That deal was for $350 million and arranged by SG.
But in addition to future-film securitization syndication revenue, observers say that AOL TW has a plethora of assets to choose from, including receivables from magazine subscriptions, real estate space, equipment leasing and even some manufacturing assets.
"They have a lot of fixed assets in place, for sure," the analyst added.
