CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) assigned to The Walt Disney Company (Disney) and its subsidiaries. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release. Approximately $15 billion of debt outstanding as of June 30, 2013 is affected by Fitch's action.
KEY RATING DRIVERS
--Fitch believes Disney has the financial flexibility and capacity at the current rating level to accommodate the company's decision to increase the level of share repurchases in a manner neutral to its credit profile.
--The ratings incorporate Fitch's expectation that the company's share repurchase and M&A activity will likely exceed free cash flow (FCF) generation.
--Disney is uniquely positioned to capitalize and monetize franchises and brands across the company's various business segments and platforms, providing Disney with a sustainable competitive advantage relative to its peers.
--Disney is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape.
The ratings reflect the company's leading market positions within its core businesses. Further, Disney has a very consistent investment strategy that is centered on creating or acquiring intellectual property and content that is leverageable across Disney's various platforms (cable and broadcast network, studio, parks and resorts, and consumer products). Disney is uniquely positioned, relative to its peers to capitalize and monetize its internally or externally developed franchises and brands, which in turn strengthens Disney's operating and credit profile and provides the company with a sustainable competitive advantage.
Disney's operating profile positions the company to generate meaningful levels of FCF (defined as cash flow from operations less capital expenditures and dividends), providing the company with considerable financial flexibility at the current ratings. Disney's investment cycle within its Parks and Resort segment is winding down, which will benefit the company's FCF generation. Fitch anticipates that Disney will generate in excess of $4 billion of annual FCF during the ratings horizon.
Fitch does not anticipate any meaningful changes to Disney's financial policy as the company increases the level of share repurchases during fiscal 2014 to range between $6 and $8 billion. Given the strength of Disney's underlying businesses, strong liquidity position, and Fitch's FCF expectations, Disney has the financial flexibility to accommodate the higher level of share repurchases in a manner consistent with its current ratings. Additionally, the company maintains an appropriate balance between returning capital to shareholders, in the form of dividends and share repurchases, and investing in the strategic needs of its business in Fitch's estimation.
Disney's capital structure and credit protection metrics remain consistent and within Fitch's expectations for the current rating. Consolidated leverage of 1.27x as of the LTM period ended June 30, 2013 is in line with fiscal year-end 2012 metrics. Going forward Fitch believes leverage will range between 1.2x and 1.4x during the ratings horizon after consideration for a modest increase in debt levels related to the higher level of share repurchases.
Disney's strong portfolio of cable networks underlines the company's ratings, and its operating profile continues to benefit from the stability, recurring dual-stream revenue profile and high operating margin characteristics attributable to its cable network business. Disney's cable networks generate a greater portion of total revenue and EBITDA, resulting in incremental stability in the total revenue and free cash flow profile. Rising programming costs, particularly sports programming, and Disney's ability to pass the higher costs onto multi-channel video programming distributors (MPVDs) will remain a significant risk to the company's operating profile. However, Fitch believes that Disney is in a strong position to retain pricing power going forward as its collection of top tier cable networks continue to command audience and ratings and be a must-carry for the MVPDs. In addition Disney has in large part, successfully matched the tenor of its long-term sports programming rights with the terms of its various affiliation agreements with the MVPDs.
Ratings incorporate the cyclicality of the company's businesses, particularly Parks & Resorts (31% of Disney's year-to-date revenue), consumer products (8%), and the advertising portion of broadcast and cable networks (19%). 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 expectations for the 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 home entertainment 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 is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. The alternative distribution platforms generate incremental demand for high high-quality content across all major end-markets (broadcast, cable networks and subscription video on demand) and that large, well-capitalized content providers, such as Disney, will remain crucial to the industry.
Disney's liquidity position and financial flexibility remain strong and is supported by significant FCF generation as well as $6 billion of aggregate available borrowing capacity (as of June 30, 2013) under three credit facilities. Commitments under these credit facilities support the company's $6 billion commercial paper program and expire during March 2014 ($1.5 billion), February 2015 ($2.25 billion) and June 2017 ($2.25 billion). In addition the company had approximately $3.9 billion of cash on hand as of June 30, 2013. Scheduled maturities (pro forma for the announced redemption of the company's 4.5% notes due Dec. 2013) are well laddered and manageable considering FCF generation expectations and access to capital markets.
Approximately $460 million of debt is scheduled to mature during fiscal 2014 followed by approximately $2 billion annually during fiscal 2014 and fiscal 2015. Fitch does not expect debt reduction going forward.
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: Negative rating actions are more likely to coincide with discretional actions of Disney's management rather than by operating performance reflecting the company's significant financial flexibility. Decisions that increase leverage beyond 1.75x in the absence of a credible plan to reduce leverage will likely lead to a negative rating action.
Total debt at June 30, 2013 was $15.0 billion and consisted of:
--$50.0 million of CP;
--$13.2 billion of notes and debentures, with maturities ranging from December 2013 - 2093;
--$273 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 $1.5 billion of foreign currency-denominated debt, including the debt related to the acquisition of UTV.
Fitch affirms Disney's ratings as follows:
The Walt Disney Company
--Issuer Default Rating (IDR) at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
--IDR at 'A';
--Senior unsecured debt at 'A'.
Disney Enterprises, Inc.
--IDR at 'A';
--Senior unsecured debt at '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 we 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).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013)
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013