TEXT - Fitch rates Walt Disney Co's proposed offering 'A'
Feb 12 - Fitch Ratings has assigned an 'A' rating to The Walt Disney Company's (Disney) proposed offering of two-year unsecured floating rate notes. The Rating Outlook is Stable. Approximately $17.5 billion of debt was outstanding as of Dec. 29, 2012. A complete list of ratings is provided at the end of this release. 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 $3 billion at Dec. 29, 2012. 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. KEY RATING DRIVERS: 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 1.5x. Ratings incorporate Fitch's expectations that the company's share repurchases and M&A activity will likely exceed FCF generation given strong liquidity and current credit profile. The company's acquisition of Lucasfilm Limited for $2 billion in cash and $2 billion of equity, along with the contemplated equity repurchase over the subsequent 24 months, is within Fitch's expectations for the company's financial policy and within the current ratings. The company's pro forma maturity schedule over the next several years (approximately $1 billion of maturities through calendar year end (CYE) 2013 (excluding CP balance), approximately $1.55 billion of maturities in CY 2014, and $1.5 billion in CY 2015) will be easily manageable with FCF and access to the capital markets. Fitch does not expect debt reduction going forward. The 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. The 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 Dec. 29, 2012 was strong and consisted of $3.2 billion of cash ($320 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 Dec. 29, 2012 was $17.5 billion and consisted of: --$3 billion of CP; --$12.3 billion of notes and debentures, with maturities ranging from December 2013-2093; --$269 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 payments; --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. --$524 million of other debt. 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. RATING SENSITIVITIES 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 consideration. Negative: Rating pressure is less likely to be driven by operating performance than by discretionary actions (debt-funded acquisitions) on the part of management. Fitch currently rates Disney as follows: The Walt Disney Company --Issuer Default Rating (IDR) 'A'; --Senior unsecured debt 'A'; --Short-term IDR 'F1'; --Commercial paper 'F1'. ABC Inc. --IDR 'A'; --Senior unsecured debt 'A'. Disney Enterprises, Inc. --IDR 'A'; --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).