Nov 27 - 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.
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
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 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.
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 consideration.
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
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