Fitch Initiates 'BB-' IDR for Warner Music; Outlook Stable.

NEW YORK -- Fitch has assigned initial ratings on Warner Music Group Corp. (WMG) and its subsidiaries as follows:

Warner Music Group

-- Issuer Default Rating (IDR) 'BB-'.

WMG Acquisition Corp

-- IDR 'BB-';

-- Secured 'BB';

-- Subordinated 'B+'.

WMG Holdings Corp

-- IDR 'BB-';

-- Unsecured 'B'.

The Rating Outlook is Stable.

The ratings are supported by the company's global footprint, diversified and established content library, solid credit metrics, leadership in the digital music space, adequate liquidity position, and strong covenant package that gives creditors a substantial amount of control over leverage, dividends and event risk. Credit concerns include substantial challenges facing the music industry related to piracy, as well as substantial returns of capital and dividends to the company's equity sponsors prior to its public offering, and Fitch's belief that equity returns will continue to be a major focus from the Board of Directors. In addition, while acquisition risk remains a concern, Fitch believes this risk is somewhat mitigated by lender covenant controls and the likelihood that any acquisition will be cash flow positive. Credit concerns also include the company's internal controls weakness related to financial reporting. The Stable Outlook is supported by the company's adequate liquidity position, recent stabilization of industry sales, the increasing proliferation and acceptance of legitimate online music sites, and WMG's early success within the digital music landscape.

According to the IFPI, total industry global recording sales for the year-ended 2005 were relatively flat versus 2004 at approximately $33.5 billion. While total retail sales have dropped significantly from its peak in the late 1990s, overall sales are stabilizing as digital downloads are starting to offset a large portion of decreases in recorded physical sales. Digital music sales for the industry nearly tripled in 2005 to $1.1 billion. To date, there are over 300 legitimate global online sites that allow the consumer to download music onto a computer and/or portable device, as well as mobile downloads available in select countries. The continued acceptance of these sites benefits the music content owners (e.g., Warner Music) as it results in additional outlets for them to distribute their content at no additional fixed cost. However, despite a successful global campaign over the last few years to promote consumer awareness, as well as positive court rulings in the second half of 2005, Fitch believes piracy will continue to be a major issue for the music industry over the long-term. Fitch also recognizes the risk related to pricing and infrastructure uncertainties as the industry continues to transition to an increasingly digital business model.

Fitch believes the company's credit metrics and financial policies are consistent with a 'BB-' IDR. The company's cash debt service ratio (defined as EBITDA divided by cash interest expense and principal debt amortization) of approximately 3.5 times (x) is appropriate for the rating; however, Fitch expects consolidated cash interest at WMG to increase beyond the next three to four years as WMG Holdings is required to pay annual cash interest of approximately $25 million beginning June 2010. However Fitch believes the company's cash debt service ratio should still remain strong as future growth in operations should be able to offset increases in interest expense. Fitch calculates EBITDA for the latest twelve month period ended March 31, 2006 at approximately $505 million with a total gross leverage (including WMG Holdings discount notes) of approximately 4.4x based on consolidated debt of $2.2 billion.

Fitch assesses the company's liquidity position based on the operating entity, WMG Acquisition Corp. As such, liquidity is adequate and comprises $338 million of cash and marketable securities at March 31, 2006 and available credit revolver of $248 million ($250 million revolver less $2 million outstanding letters of credit). Liquidity is also supported by free cash flow which Fitch estimates will be in excess of $100 million annually after deducting for common dividends. The company's credit revolver matures February 2010. Due to low capital expenditure requirements, the company's cash from operations divided by capital expenditures is strong at approximately 9x.

The company's bank debt contains strict covenants related to change of control, financial metrics, additional indebtedness and dividends, which Fitch believes substantially reduce financial and event risk for these lenders. This includes a maximum net leverage covenant that decreases from 4.75x at year-end 2007 to 3.5x in 2010. For the twelve month period ended March 31, 2006, Fitch estimates this ratio as calculated by the covenants to be approximately 3.9x. The indenture related to WMG Acquisition Corp.'s subordinated notes have a cross-acceleration feature with the bank debt and contain less-restrictive covenants related to change of control and additional indebtedness, which Fitch does not believe provides a significant amount of creditor protection. The indenture does, however, provide adequate protection related to dividends out of WMG Acquisition Corp. Further, WMG Holdings Corp.'s indenture for the unsecured notes provides fairly limited restrictions on additional indebtedness, change of control and dividends, all mainly governed by a 2x minimum fixed charge coverage.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have been initiated by Fitch as a service to investors.