Fitch Rates Disney's Proposed Offering 'A'; Outlook Stable
NEW YORK -- November 27, 2012
Fitch Ratings has assigned an 'A' rating to The Walt Disney Company's (Disney)
proposed offering of benchmark 3-, 5-, 10-, and 30-year senior unsecured
notes. The Rating Outlook is Stable. A full rating list is shown below.
The notes will be issued under Disney's existing indenture dated Sept. 24,
2001, and will be pari passu with all existing debt. Similar to existing
bonds, there are no financial covenants. Proceeds will be used for general
corporate purposes. Fitch expects the company to use the proceeds of this
issuance to term-out commercial paper (CP) outstanding, which totaled $2.05
billion at Sept. 29, 2012.
The ratings and Outlook reflect Disney's ample financial flexibility,
underpinned by strong free cash flow (FCF) generation that Fitch expects to
exceed $3.5 billion beginning fiscal 2013, and total leverage around 1.3x.
Ratings incorporate Fitch's expectations that the company will deploy all of
its FCF for share repurchases and M&A, as well as moderate activity in excess
of FCF, given strong liquidity and current credit profile. The company's
recent announcement that it would acquire film production company Lucasfilm
Limited for $2 billion in cash and $2 billion of equity, with the equity
repurchased over the subsequent 24 months, is within Fitch's expectations for
the company's financial policy and within the current ratings.
The company's maturity schedule over the next several years ($750 million of
maturities through calendar year end (CYE) 2012, approximately $1 billion of
maturities in CY 2013, and $1.45 billion in CY 2014) will be easily manageable
with FCF and access to the capital markets. Fitch does not expect debt
reduction going forward.
Ratings incorporate the cyclicality of Disney's businesses, particularly Parks
& Resorts (31% of revenue), Consumer Products (8%), and the advertising
portion of Broadcast and Cable Networks (18%). These businesses have exhibited
a degree of resiliency in the recent sluggish macroeconomic backdrop but
remain at risk in the event of a more severe economic downturn. Should
macroeconomic volatility return, Fitch expects these cyclical businesses to be
under renewed pressure but that the company's credit and financial profile
will likely remain within current ratings. Ratings incorporate Fitch's
expectation that the Studio Entertainment business, similar to that of its
peers, will remain volatile and low margin, given the hit-driven nature. The
decline of DVD sales, which is the window in which many films become
profitable, is becoming less of a concern amid the growth of higher-margin
digital distribution, and should be accommodated within current ratings.
Disney's liquidity at Sept. 29, 2012 was strong and consisted of $3.4 billion
of cash ($548 million of which was held at the International Theme Parks), as
well as $4.5 billion available under two revolving credit facilities (RCF) of
$2.25 billion each; the first matures in February 2015 and the second in June
2017. These facilities backstop Disney's CP program. Liquidity is further
supported by the company's aforementioned strong annual FCF generation.
Total debt at Sept. 29, 2012 was $14.3 billion and consisted of:
--$2.05 billion of CP;
--$10.1 billion of notes and debentures, with maturities ranging from December
--$267 million of debt related to Hong Kong Disneyland (Disneyland Paris debt
is no longer outstanding after Disney refinanced it with intercompany debt in
September 2012), which is non-recourse back to Disney but which Fitch
consolidates under the assumption that the company would back the loan
--Approximately $1.3 billion of foreign currency-denominated debt, including
approximately $300 million of debt assumed in the February 2012 acquisition of
UTV, which was refinanced in September 2012.
Fitch notes the company's pension was 70% funded at Sept. 29, 2012 (the last
reported date). While annual pension funding obligations of several hundred
million dollars should continue over the next few years, they will be more
than covered by FCF.
KEY RATING DRIVERS
Positive: Upward momentum to the ratings is unlikely over the intermediate
term. However, a compelling rationale for, and an explicit public commitment
to more conservative leverage thresholds could result in upgrade
Negative: Rating pressure is less likely to be driven by operating performance
than by discretionary actions (debt-funded acquisitions) on the part of
Fitch rates Disney as follows:
The Walt Disney Company
--Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
--Senior unsecured debt 'A'.
Disney Enterprises, Inc.
--Senior unsecured debt 'A'.
Fitch links the IDRs of the issuing entities (predominantly based on the lack
of any material restrictions on movements of cash between the entities) and
treats the unsecured debt of the entire company as pari passu. Fitch
recognizes the absence of upstream guarantees from the operating assets and
that debt at Disney Enterprises is structurally senior to the holding company
debt. However, Fitch does not distinguish the issue ratings at the two
entities due to the strong 'A' category investment-grade IDR, Fitch's
expectations of stable financial policies, and the anticipation that future
debt will be issued by Walt Disney Company. Fitch would consider
distinguishing between the ratings if there appeared to be heightened risk of
the company's IDR falling to non-investment grade (where Disney Enterprises'
enhanced recovery prospects would be more relevant).
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012);
--'Parent and Subsidiary Ratings Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Short-Term Ratings Criteria for Non-Financial Corporates
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Melissa Link, CFA
One State Street Plaza
New York, NY 10004
Mike Simonton, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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