September 17, 2012 / 4:12 PM / 5 years ago

TEXT-Fitch affirms Disney's IDR at 'A'

Sept 17 - Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) of
The Walt Disney Company (Disney) and its subsidiaries. The Rating
Outlook is Stable. A full list of ratings can be found at the end of this 

The ratings and Stable Outlook reflect Disney's ample financial flexibility, 
underpinned by strong free cash flow generation, total leverage around 1.4x and 
net adjusted leverage (excluding international parks and minority stake in ESPN,
and including investments in A&E/Lifetime) below 1.0x. Fitch expects annual free
cash flow generation to exceed $3.5 billion beginning in fiscal 2013, after a 
low point in fiscal year (FY) 2012 of approximately $2.5 billion due to several 
large capital projects. Although the company faces a considerable maturity 
schedule over the next several years, it will be easily manageable with free 
cash flow and access to the capital markets. Ratings incorporate Fitch's 
expectations that the company will deploy all of its free cash flow for share 
repurchases and M&A, as well as moderate activity in excess of free cash flow, 
given strong liquidity and current credit profile.

Ratings incorporate the cyclicality of the company's businesses, particularly 
Parks & Resorts (30% of revenue), Consumer Products (8%), and the advertising 
portion of Broadcast and Cable Networks (19%). These businesses have exhibited a
degree of resiliency in the recent sluggish macroeconomic backdrop but remain at
risk in the event of a more severe economic downturn. Parks & Resorts and 
Consumer Products are exposed to consumer discretionary spending, and have 
exhibited mid- to high-single digit growth. Parks & Resorts has benefited from 
increased per capita spending, higher attendance, and the recent cruise ship 
launches. Broadcasting has grown 1%-2% in FY2012 (excluding political 
fluctuations), as local advertising at the owned and operated stations remains 
stable, and higher ad prices offset lower ratings at the ABC network. 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 current ratings. 

The growth of Disney's cable networks has resulted in the recurring, high-margin
carriage fees comprising a greater portion of total revenue, resulting in 
incremental stability in the total revenue and free cash flow profile. 
Nonetheless, Fitch believes this segment, particularly ESPN, will face rising 
programming costs, as evidenced by the recent NFL and MLB broadcasting agreement
renewals, which included substantially higher license fees. There is a 
longer-term risk to the ability of cable networks in general to pass increased 
programming costs onto distributors, who heretofore have pushed higher affiliate
fees through to subscribers. ESPN faces some incremental risk given the 
long-term nature of sports-rights contracts. However, Fitch believes that the 
top tier channels that can continue to command audience share/ratings will 
continue to be a must-carry for the distributors and are likely to retain 
pricing power going forward. 

Fitch continues to believe that over-the-top (OTT), or Internet-based, 
television content will not have a material negative impact on Disney's credit 
profile or free cash flow over the intermediate term. Fitch also believes 
consumer demand for high quality, expensively-produced content will continue 
unabated, and that large, well-capitalized content providers, such as Disney, 
will remain crucial to the industry. Fitch believes Disney will continue to 
distribute its owned content rationally and with the goal of maximizing its 
long-term profitability and franchise value. Further, in Fitch's opinion, the 
proliferation of new OTT entrants (Amazon, Comcast, etc.) and methods of 
consumption (smartphones, tablets) will continue to drive more demand for 
Disney's content, providing upside. Lastly, Fitch believes the 'TV Everywhere' 
initiative being undertaken by Disney and many of its peers could potentially 
increase the stickiness of traditional pay TV packages. 

Ratings incorporate Disney's ability, surpassing that of its peers, to 
consistently leverage and monetize its brands and characters across all aspects 
of its business: TV, movies, music, theme parks, consumer products and other 
licensing opportunities, which benefits the company's operating profile and free
cash flow generation. The company has also successfully bolstered its organic 
franchises with those of prior acquisitions, such as Marvel and Pixar. Fitch 
expects this ability to continue, given the company's vast resources to attract 
and develop content and talent. 

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 DVD 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 

Disney's liquidity at June 30, 2012 was strong and consisted of $4.4 billion of 
cash ($532 million of which was held at the International Theme Parks), as well 
as $4.5 billion available under two revolving credit facilities (RCF) of $2.25 
billion each; the first matures in February 2015 and the second in June 2017. 
These facilities backstop Disney's commercial paper (CP) program. Liquidity is 
further supported by the company's aforementioned strong annual free cash flow 

Total debt at June 30, 2012 was $15 billion and consisted primarily of:

--$1 billion of CP;

--$10.1 billion of notes and debentures, with maturities ranging from December 
2012 - 2093;

--$2 billion of debt related to Disneyland Paris and Hong Kong Disneyland, 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; 

--Approximately $1.1 billion of European notes and other foreign currency 
denominated debt;

--Approximately $300 million of debt assumed in the February 2012 acquisition of

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 of several hundred million dollars should continue over the next few
years, they will be more than covered by free cash flow. 


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: Rating pressure is less likely to be driven by operating performance 
than by discretionary actions (debt-funded acquisitions) on the part of 

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'.

ABC Inc.

--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 ''. 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 &

Our Standards:The Thomson Reuters Trust Principles.
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