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Fitch Rates Disney's Senior Unsecured Note Offering 'A' ; Outlook Stable
October 3, 2017 / 4:04 PM / 2 months ago

Fitch Rates Disney's Senior Unsecured Note Offering 'A' ; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has assigned an 'A' rating to The Walt Disney Company's (Disney) offering of benchmarked-sized senior unsecured notes due 2024. The notes are being offered in Canada by private placement. Proceeds from the offering are expected to be used for general corporate purposes including the repayment of outstanding debt. Fitch currently rates Disney's Issuer Default Rating (IDR) 'A'. The notes will rank pari passu with Disney's other unsecured indebtedness. Approximately $22.2 billion of debt was outstanding as of July 1, 2017, including $1.4 billion of commercial paper. A full list of ratings follows at the end of this release. KEY RATING DRIVERS Significant Financial Flexibility: Disney's operating profile positions the company to generate free cash flow (FCF) in excess of $3.5 billion annually during the ratings horizon, which, coupled with strong liquidity and solid credit metrics provides the company with considerable financial flexibility at the current ratings. Consistent Financial Policy: Given the strength of Disney's underlying businesses, strong liquidity position, and Fitch's FCF expectations, Disney has the financial flexibility to accommodate a higher level of share repurchases, which are expected to range between $9 billion and $10 billion during fiscal 2017, in a manner consistent with its current ratings. The ratings incorporate Fitch's expectations that the company's share repurchases and M&A activity will likely exceed FCF generation given strong liquidity and the current credit profile. Leading Market Positions and Leveragability: Disney has a very consistent investment strategy centered on creating or acquiring intellectual property and content that is leverageable across Disney's various platforms. Disney is uniquely positioned, relative to its peers, to capitalize and monetize its internally or externally developed franchises and brands, which in turn strengthens its operating and credit profile and provides Disney with a sustainable competitive advantage. Strength of Cable Networks: Disney's strong portfolio of cable networks, ESPN in particular, underpin the company's ratings. Fitch believes that the top-tier channels will continue to be a must-carry for the distributors and are likely to retain pricing power. Notwithstanding moderate subscriber declines, Disney's operating profile benefits from the stability, recurring dual-stream revenue profile, high operating margin and FCF generation characteristics attributable to its cable network business. Fitch expects this segment will continue to generate a significant amount of Disney's cash flow. Credible Strategy to Address Threats: Disney's strong asset portfolio positions the company to address the secular threats and opportunities presented by alternative distribution platforms such as OTT services and digital multi-channel video programming distributors (MVPDs), and continued audience fragmentation across the media and entertainment landscape. Though the broadcasting and media industry continue to feel the pressure of subscriber losses, Fitch believes Disney has the appropriate levers in place and investment strategy to address changing consumer habits. DERIVATION SUMMARY Overall, 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 its various platforms (cable and broadcast network, studio, parks and resorts, and consumer products). Disney's cable networks generate the largest portion of total revenue and EBITDA, resulting in incremental stability in the total revenue and FCF profile. Secular issues such as the stagnant multi-channel video subscriber base and its effect on affiliate fee revenue, rising programming costs, particularly sports programming, the impact of foreign exchange, and Disney's ability to pass the higher costs on to multi-channel video programming distributors (MVPDs) 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. The ratings incorporate the cyclicality of the company's businesses, particularly Parks & Resorts, Consumer Products & Interactive Media, and the advertising portion of broadcast and cable networks. 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. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include: --Revenue growth within the company's cable networks business (Disney's Media Networks segment) reflects the stability of the business and modest affiliation-fee increases partially offset by subscriber losses. Long-term contracts and built-in price escalators support affiliation-fee growth. The base case assumes cable revenue growth in the low-single digits for the balance of the forecast. --Disney's broadcasting business benefits from a stable economic and advertising environment while incorporating a typical political advertising revenue cycle. Additionally, this segment will benefit from growing retransmission consent fees. Revenue growth ranges between 2% during nonpolitical years and 3%-4% during political years. --Domestic revenues grow faster than International revenues within the company's Parks and Resort segment in fiscal 2018 and 2019 when Avatar Land and Star Wars Land open. The base case assumes domestic revenues grow approximately 6% during the forecast period while international revenues grow 5% after a significant bump in 2016-2017 following the opening of Shanghai Disney Land. --Fitch expects a single-digit decline within Disney's Studio Entertainment segment in 2017 due to fewer releases and difficult prior year comps with respect to home entertainment (i.e. Star Wars). Television and SVOD revenues grow at a mid-single-digit pace while home entertainment revenues remain flat-to-down single digits. Growth is expected to resume in 2018 based on a strong film slate and anticipated home releases tracking the success of the film slate. --Consumer products and Interactive Media segment revenue growth assumptions remain in the mid-single-digit range in 2017-2019; 2016 benefits from licensing of Star Wars. --From a margin perspective, the base case assumes margin contraction within the company's Media Networks segment as subscriber losses and increased sports programming costs offset affiliate growth. Fitch believes there is potential for margin expansion if OTT and digital MVPDs are successful and will more than offset subscriber losses. Disney's investments within its Parks and Resort segment lead to higher margins within its domestic business in 2019-2020. Studio Entertainment margins beyond 2017 remain relatively consistent with 2016, generating double digit margins. A weaker film slate and fewer releases in 2017 are expected to pressure margins. --Scheduled debt maturities are refinanced upon maturity. 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: Negative rating actions are more likely to coincide with discretionary 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. LIQUIDITY Disney's liquidity position and financial flexibility remain strong and are supported by significant FCF generation as well as $7 billion of aggregate available borrowing capacity, as of July 1, 2017, under three credit facilities. Commitments under these credit facilities support the company's $7 billion CP program and expire during March 2018 ($2.5 billion), March 2019 ($2.25 billion) and March 2021 ($2.25 billion). In addition, the company had approximately $4.3 billion of cash on hand as of July 1, 2017. Scheduled maturities are well-laddered and manageable considering FCF generation expectations and access to capital markets. Disney has approximately $1.8 billion of debt that is scheduled to mature during fiscal 2018 followed by $2.8 billion during fiscal 2019. Fitch does not expect debt reduction going forward. FULL LIST OF RATING ACTIONS FULL LIST OF RATING ACTIONS Fitch currently rates Disney as follows: The Walt Disney Company --Issuer Default Rating (IDR) 'A'; --Senior unsecured debt 'A'; --Senior unsecured revolvers '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'. The Rating Outlook is Stable. 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 it perceived heightened risk of the company's IDR falling to non-investment grade (where Disney Enterprises' enhanced recovery prospects would be more relevant). Contact: Primary Analyst David Peterson Senior Director +1-312-368-3177 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Patrice Cucinello Director +1-212-908-0899 Committee Chairperson John Culver, CFA Senior Director +1-312-368-3216 Date of Relevant Rating Committee: March 31, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --No material adjustments have been made that have not been disclosed in public fillings of this issuer. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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