AOL Time Warner Inc's outlook was changed to negative from stable by Standard & Poor's, based on the "weaker than expected" operating performance of the company's America Online Internet service.
A negative outlook means S&P is more inclined to lower AOL Time Warner's credit ratings. That could increase the company's borrowing costs. S&P also affirmed AOL Time Warner's current credit rating of BBB+, three levels above junk, and assigned the same rating to a new US$10 billion line of credit.
The lower outlook reflects the 27 percent decline in earnings before interest, taxes, depreciation and amortization, or Ebitda, at America Online in the second quarter, S&P said. Advertising sales declined 42 percent at the world's largest Internet service.
"Standard & Poor's is concerned that weaker than expected operating performance at the AOL business unit may persist," the ratings company said in a statement. "The decline in America Online ebitda places a burden on the Time Warner divisions to deliver performance that will meet earnings targets."
Along with America Online, AOL Time Warner owns the Time Inc, the magazine publishing company, the Warner Brothers movie studio, Warner Music Group, cable-TV networks including CNN and HBO, and the second-largest US cable-TV system operator.
The lowered outlook also reflects earnings forecasts that the company reduced on Wednesday and a US Securities and Exchange Commission investigation of America Online's accounting practices.
The investigation could distract AOL Time Warner managers from the company's operations, S&P said.
AOL Time Warner Chief Financial Officer Wayne Pace said Wednesday that he's "very comfortable" that the company's accounting is proper. Ebitda this year will fall in the low end of its previous forecast of 5 percent to 9 percent, the company said.
"We've clearly maintained our high-quality investment-grade rating and we're committed to keeping it," AOL Time Warner spokeswoman Tricia Primrose said.
AOL Time Warner shares rose US$1.26, or 13 percent on Friday, to US$10.90.
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