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Fitch Rates Disney's Senior Unsecured Note Offering 'A'; Outlook Stable
March 1, 2017 / 8:46 PM / 9 months ago

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

(The following statement was released by the rating agency) CHICAGO, March 01 (Fitch) Fitch Ratings has assigned an 'A' rating to The Walt Disney Company's (Disney) proposed offering of benchmark-sized three- and five- year fixed- and floating-rate senior unsecured notes. The Rating Outlook is Stable. The 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'. Approximately $20.7 billion of debt was outstanding as of Dec. 31, 2016, including $2.3 billion of commercial paper (CP). A full list of ratings follows at the end of this release. Disney's capital structure and credit protection metrics remain consistent and within Fitch's expectations for the current rating. Consolidated leverage of 1.2x as of the latest 12 months (LTM) period ended Dec. 31, 2016, is in line with fiscal year-end 2016 and 2015 metrics. Going forward, Fitch believes leverage will range between 1x and 1.3x during the ratings horizon after consideration for a modest increase in debt levels related to the higher level of share repurchases. 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. Disney's investment cycle within its Parks and Resorts segment is expected to increase capital spending in excess of $5 billion during fiscal 2017, which will temporarily hamper FCF generation. 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 $7billion and $8 billion during fiscal 2017, consistent with its current ratings. 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 the company's operating and credit profile and provides Disney with a sustainable competitive advantage. Strength of Cable Networks: Disney's strong portfolio of cable networks, particularly ESPN, underlies 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. 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 emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. Fitch does not anticipate any meaningful changes to Disney's financial policy over the ratings horizon. In our view Disney 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 terms of capital allocation priority, investing in internal opportunities focused on organic growth, such as the company's investment in its various parks and resorts worldwide and long-term sports rights deals, rightly takes precedence over merger and acquisitions and shareholder returns. Fitch expects that Disney will manage the level of share repurchase activity in a manner consistent with its current ratings and acknowledges that the company's share repurchases and M&A activity will likely exceed FCF generation. Fitch anticipates share repurchases to range between $7 billion and $8 billion during fiscal 2017. Disney repurchased approximately 15 million shares of its common stock for approximately $1.5 billion during the first quarter of fiscal 2017. As of Dec. 31, 2016, the company had remaining authorization to repurchase approximately 267 million additional shares. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: --Revenue growth within the company's cable networks business (Disney's Media Networks segment) reflects the stability of the business and expected affiliate fee increases. Fitch anticipates mid-single-digit affiliate revenue growth. --Disney's broadcasting business benefits from a stable economic and advertising environment while incorporating typical political advertising revenue cycle. Additionally, this segment will benefit from growing retransmission consent fees. Revenue growth ranges between 2% during non-political years and 4% during political years. --Programming expenses are expected to increase by high-single digits driven by sports rights costs. --Fitch assumes typical volatility within the Studio Entertainment, Parks and Resort, and Consumer Products & Interactive Media operating segments. --International revenues grow faster than domestic revenues within the company's Parks and Resort segment in fiscal 2017. Fitch expects mid-single-digit growth in domestic park revenues as a result of the opening of Pandora - The World of Avatar. --Fitch expects flat- to low-double-digit growth within Disney's Studio Entertainment segment this year due to a fewer number of theatrical releases in fiscal 2017. Home entertainment revenues will track the theatrical success in 2016-2018. Television and SVOD revenues grow at a mid-single-digit pace while home entertainment revenues remain flat. --From a margin perspective, the base case assumes relatively flat margins within the company's Media Networks segment as retransmission revenue gains enhance broadcast margins while cable network margins remain stable reflecting the company's ability to grow higher margin affiliate fee revenues at a similar pace as increasing programming costs. 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 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 $6 billion of aggregate available borrowing capacity (as of Dec. 31, 2016) under three credit facilities. Commitments under these credit facilities support the company's $6 billion CP program and expire during March 2017 ($1.5 billion), March 2019 ($2.25 billion) and March 2021 ($2.25 billion). In addition, the company had approximately $3.7 billion of cash on hand as of Dec. 31, 2016. Scheduled maturities are well laddered and manageable considering FCF generation expectations and access to capital markets. Disney has approximately $1.1 billion of debt scheduled to mature during the remainder of its fiscal 2017 followed by $1.8 billion during fiscal 2018. Fitch does not expect debt reduction going forward. Total debt as of Dec. 31, 2016 was approximately $20.5 billion and consisted of: --$2.3 billion of CP; --$168 billion of notes and debentures, with maturities ranging from May 2017 to 2093; --$1.1 billion of debt related to international theme bark borrowings, which is non-recourse back to Disney but which Fitch consolidates under the assumption that the company would back the loan payments; --Approximately $329 million of foreign currency-denominated debt. 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, we do 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). FULL LIST OF RATING ACTIONS Fitch currently has the following ratings: 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. Contact: Primary Analyst David Peterson Senior Director +1-312-368-3177 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Rachael Shanker, CFA Associate Director +1-212-908-0649 Committee Chairperson Jack Kranefuss Senior Director +1-212-908-0791 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:; Hannah James, New York, Tel: + 1 646 582 4947, Email: Date of Relevant Rating Committee: March 29, 2016 Additional information is available on Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019918 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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