News Column

Fitch Rates Disney's Proposed Offering 'A'

May 28, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to The Walt Disney Company's (Disney) proposed offering of benchmark-sized three-, five-, and 30-year senior unsecured notes. The Rating Outlook is Stable. Approximately $15.6 billion of debt was outstanding as of March 31, 2014. A full list of ratings follows at the end of this release.

Proceeds will be used for general corporate purposes including repayment of debt and commercial paper (CP). Outstanding CP totaled $2.3 billion as of March 31, 2014. 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.

KEY RATING DRIVERS

--Fitch believes Disney has the financial flexibility and capacity at the current rating level to accommodate a higher level of share repurchases during its fiscal year 2014 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.

Disney's capital structure and credit protection metrics remain consistent and within Fitch's expectations for the current rating. Consolidated leverage of 1.16x as of the LTM period ended March 31, 2014 is in line with fiscal year-end 2013 metrics. Going forward Fitch believes leverage will range between 1.2x and 1.4x during the ratings horizon after consideration of a modest increase in debt levels related to the higher level of share repurchases.

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 billion and $8 billion. Through May 6, 2014, Disney has repurchased 58.2 million shares of its common stock for approximately $4.3 billion. As of March 29, 2014, the company had authorization to repurchase 116 million additional shares. 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, in Fitch's estimation 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.

Disney's operating profile positions it 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 generated approximately $5.3 billion of FCF through the LTM period ended March 31, 2014. 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.

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 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 strong portfolio of cable networks underlines the company's ratings, and its operating profile continues to benefit from the stable, 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 FCF profile. Rising programming costs, particularly sports programming, and Disney's ability to pass the higher costs along to 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, will remain volatile and low margin, similar to that of its peers, 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. Fitch expects alternative distribution platforms to generate incremental demand for high-quality content across all major end-markets (broadcast, cable networks and subscription video on demand) and large, well-capitalized content providers, such as Disney, to remain crucial to the industry.

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 March 31, 2014) under three credit facilities. Commitments under these facilities support the company's $6 billion CP program and expire during March 2015 ($1.5 billion), June 2017 ($2.25 billion) and March 2019 ($2.25 billion). In addition, the company had approximately $4.1 billion of cash on hand as of March 31, 2014. Scheduled maturities (pro forma for the announced repayment of debt and CP) are well-laddered and manageable considering FCF generation expectations and access to capital markets.

Approximately $2.8 billion (including $2.3 billion of CP) of debt is scheduled to mature during fiscal 2014 followed by approximately $2 billion annually during fiscal 2015 and fiscal 2016 (Fiscal year ends September). Fitch does not expect debt reduction going forward.

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 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 March 31, 2014 was $15.6 billion and consisted of:

--$2.3 billion of CP;

--$12.2 billion of notes and debentures, with maturities ranging from December 2014 - 2093;

--$256 million of debt related to 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;

--$554 million of foreign currency-denominated debt;

--$318 million of other debt.

Fitch currently rates Disney 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 it appeared there was 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: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832006

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

David Peterson, +1 312-368-3177

Senior Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Rolando Larrondo, +1 212-908-0223

Senior Director

or

Committee Chairperson

Mike Simonton, CFA, +1 312-368-3138

Managing Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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