Standard & Poor's late Friday revised its outlook for AOL Time Warner Inc. (AOL) to "negative" from "stable" due to weak operating performance at the world's largest media company's America Online unit.

The credit rating agency affirmed AOL's "BBB-plus" corporate credit rating, its third lowest investment grade. A negative outlook suggests conditions are present that may lead to a downgrade, not that a downgrade is imminent.

AOL shares fell 50 cents in after-hours trading to $10.40. They had surged $1.26, or 13.1 percent, on Friday.

S&P said it is concerned that America Online's deteriorating advertising sales might crimp profits and increase the burden on the company's Time Warner divisions to make up any shortfall.

It said a Securities and Exchange Commission inquiry into accounting practices at America Online, disclosed by AOl on Wednesday, adds to investor uncertainty and may consume significant amounts of management time, impeding AOL's ability to improve its operating performance.

The shares had fallen to a near four-year low on Thursday after AOL disclosed the SEC inquiry. Investors have wiped out 66 percent of AOL's stock market value this year and pushed its bond yields to junk bond-like levels.

"I'm not certain why the bonds are trading as poorly as they are," said Steve Bohlin, who helps invest $2.2 billion for Thornburg Investment Management Co. in Santa Fe, New Mexico and owns AOL bonds. "The company, aside from America Online, is doing well and growing nicely, and just completed a $10 billion credit line. There is not a liquidity crunch."

S&P added that last week's management shakeup -- including the departure of Chief Operating Officer Robert Pittman, who personified the brash Internet business he helped to build and had been expected to revive America Online -- was a positive for AOL's credit ratings.

Moody's Investors Service rates AOL's senior unsecured debt "Baa1," equal to S&P's rating, with a stable outlook. AOL is based in New York.


AOL Chief Executive Richard Parsons said on Wednesday the SEC opened a fact-finding inquiry into America Online's accounting, but that the company's auditors backed the accounting in question.

Last week the Washington Post reported that the online unit may have inflated revenue in 2000 and 2001.

AOL Time Warner this week reported its first net profit since Internet pioneer America Online completed its $106.2 billion takeover of media company Time Warner in January 2001.

It posted a second-quarter net profit of $394 million, or 9 cents per share, on revenue of $10.6 billion. A year earlier it lost a net $734 million, or 17 cents per share.

The company's 6.875 percent notes maturing in 2012 have lost one-fourth of their value in fewer than four months. Traders said the bonds were bid Friday at 75 cents on the dollar for a yield of 11.14 percent. Ten-year U.S. Treasuries, in contrast, yield 4.39 percent.

AOL runs Cable News Network and Home Box Office and publishes People and Sports Illustrated magazines. Its Turner Broadcasting System unit, the home of CNN and the Cartoon Network, also owns the Atlanta Braves baseball team.