Fitch Rates Disney's Proposed Offering 'A'; Outlook Stable

Fitch Rates Disney's Proposed Offering 'A'; Outlook Stable | Bild: © ad-hoc-news

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 a portion of its current commercial paper (CP) outstanding.

The ratings and Outlook reflect Disney's ample financial flexibility, underpinned by strong free cash flow generation, total leverage around 1.4 times (x) and net leverage (excluding international parks and the minority stake in ESPN, and including investments in A&E/Lifetime) below 1.0x. The company faces $2 billion of maturities in calendar year (CY) 2012, including a $1.25 billion note due on March 1. While these maturities could easily be repaid with cash on hand and free cash flow, Fitch expects, and the ratings incorporate, that Disney will use its cash for internal investments, share buybacks, and moderate M&A activity rather than debt reduction.

Ratings reflect Disney's consistent ability, surpassing that of its peers, to consistently leverage and monetize its brands and characters across all aspects of its business, which benefits the company's operating profile and free cash flow generation. Fitch expects this ability to continue, given the company's vast resources to attract and develop content and talent.

Ratings concerns center on the cyclicality of the company's businesses, particularly Parks & Resorts (consumer spending) and Broadcasting (local and national advertising). Should macroeconomic pressures intensify, Fitch expects these cyclical businesses to be under renewed pressure in fiscal year (FY) 2012 but that the company's credit and financial profile will likely remain within current ratings.

The ratings also factor in the emergence of over-the-top (OTT), television content that has increased the risk customers will turn to such alternatives in lieu of traditional pay-TV subscriptions. Fitch sees several mitigants to widespread cancellation of traditional pay-TV subscriptions. Importantly, those networks that continue to be demanded by consumers will remain very profitable and generate substantial free cash flow. Fitch views Disney's recent omnibus distribution agreement with Comcast as evidence of its belief that providers of in-demand, high quality content will continue to monetize it in incremental ways and thrive amid, rather than be pressured by, the proliferation of alternative distribution platforms.

Disney's liquidity at Dec. 31, 2011 was solid and consisted of $3.7 billion of cash ($625 million of which was held at the International Theme Parks), as well as $4.45 billion (net of $47 million letters of credit) available under two revolving credit facilities (RCF) of $2.25 billion each; the first matures in February 2013 and the second in February 2015. These facilities backstop Disney's CP program. Liquidity is further supported by the company's annual free cash flow generation, which Fitch expects to dip to less than $2 billion in FY2012 given a large project-based high capex outlay, but which is expected to return to more than $3.5 billion beginning FY2013.

Total debt at Dec. 31, 2011 was $14.4 billion and consisted of:

--$607 million of CP;

--$10 billion of notes and debentures, with maturities ranging from 2012-2093;

--$2.1 billion of debt related to Disneyland Paris and Hong Kong Disney, which is non-recourse back to Disney but which Fitch consolidates under the assumption that the company would back the loan payments rather than risk hurting its brand image by letting these entities default;

--$1.6 billion of other domestic and European notes and other debt.

The company's material maturity schedule could be handled organically if needed, given free cash flow expectations. Fitch notes the company's pension was 69% funded at Oct. 1, 2011 (the last reported date). While annual pension funding obligations could total several hundred million dollars over the next few years, they will be more than covered by free cash flow.

Fitch links the Issuer Default Ratings (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 it viewed there to be heightened risk of the company's IDR falling to non-investment grade (where Disney Enterprises' enhanced recovery prospects would be more relevant).

Fitch currently maintains the following ratings:

The Walt Disney Company

--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'.

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 and Related Research:

--'Corporate Rating Methodology' Aug. 12, 2011;

--'Short-Term Rating Criteria for Non-Financial Corporates' Jan. 18, 2012;

--'Parent and Subsidiary Rating Linkage' Aug. 12, 2011;

--'Evaluating Corporate Governance' Dec. 13, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Short-Term Rating Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

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