Fitch Ratings has assigned an 'A' rating to The Walt Disney Company's (Disney) $500 million 10-year 5.5% senior unsecured note offering.
Disney's ratings and Stable Outlook continue to reflect the company's leading market positions in core businesses, unique brand franchises, and strong cash flows. Credit concerns center on the cyclical volatility of its theme parks and resorts, and studio and broadcast network businesses.
The cyclical challenges facing the media & entertainment industry relate to both the existing weak macro-economic environment as well as the general volatility that accompanies hit-driven businesses. Fitch believes that Disney is less exposed to some of the advertising-based cyclical challenges facing other media & entertainment companies given its small reliance on local advertising. As such, Fitch expects most of Disney's weakness over the next 1-2 years to be driven by cyclical factors.
Fitch believes Disney's Media Networks segment could face a difficult 2009 as national advertising could be down over 10% at its ABC and ESPN franchises as the difficult environment is exacerbated by a weak ratings season to-date, resulting in more advertising inventory needed to be dedicated to make-goods. Standard increases in cable carriage fees, as well as cost cuts at the TV studio should offset some of the advertising weakness.
While the current macro-economic environment will pressure the Parks and Resorts segment, Fitch believes the company's focus on its lower cost value hotel packages could make the downturn less severe. The 4-for-7 hotel offer should result in material declines in its hotel revenues which represent approximately 20% of domestic segment revenue. The special offer, however, should result in less severe downturns for the remaining 80% of domestic segment revenue (admissions, food, beverage, merchandise, etc.). Fitch is currently estimating results for the domestic parks and resorts segment through 2010 to finish slightly better than 2002 and 2003 figures.
As has been the case for several years, Disney's Filmed Entertainment segment faces difficult comparisons from a theatrical and home entertainment standpoint. Fitch expects the segments' revenues could be down materially in 2009 generally because of its release schedule. As a long-term secular issue, Fitch believes cash flows from Disney's home entertainment business may prove more resilient than the rest of the industry. Industry DVD sales have matured and are currently experiencing declines that Fitch believes are secular in nature, as Fitch expects a permanent downward shift in consumer DVD purchases as well as increasing issues related to digital piracy. Specifically related to Disney, Fitch believes the company may be able to outperform the industry based on the expectation that family entertainment DVD sales will continue to be a low-cost portion of household budgets, as well as the expectation for less piracy issues in this genre.
Despite the difficult environment, and the expectations for relatively weak performance over the next 12-18 months, Fitch expects Disney's consolidated net leverage ratio to remain below 2 times (x) through this downturn, and for its net leverage ratio excluding net non-recourse debt and ESPN minority interests to remain below 1.5x. Stresses to the company's operations required to impair financial flexibility are consistent with an 'A' rating, and Fitch believes that even in the midst of a difficult economy, potential rating pressure is less likely to be driven by operating performance than by discretionary actions on the part of management. There is no room in the current ratings for management to resume a material share repurchase program in this environment.
The company's liquidity is strong with $3.8 billion of cash and $1.8 billion available under its $4.5 billion revolvers (after deducting for $2.7 billion of commercial paper outstanding) at Dec. 31, 2008. The company' maturity schedule is manageable with approximately $800 million of medium term notes coming due in each of the next four years.
For additional information, please see Fitch's report 'The Walt Disney Company: Credit Stability Amid a Weakening Economy dated July 21, 2008, available on the Fitch Ratings web site at www.fitchratings.com, under the tags:
Corporate Finance > Corporates > Special Reports
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.
Contacts:
Fitch Ratings
Jamie Rizzo, CFA, 212-908-0548 (New York)
Mike
Simonton, CFA, 312-368-3138 (Chicago)
Sandro Scenga, 212-908-0278
(Media
Relations, New York)
sandro.scenga@fitchratings.com