Fitch Affirms Disney's IDR at 'A'; Outlook Stable
(The following statement was released by the rating agency) CHICAGO, April 03 (Fitch) Fitch Ratings has affirmed the Issuer Default Rating (IDR) assigned to The Walt Disney Company (Disney) and its subsidiaries at 'A'. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release. Approximately $21.5 billion of pro forma debt outstanding as of Dec. 31, 2016 is affected by this action. 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 to approximately $5.3 billion during fiscal 2017 due to the construction of Star Wars Land and Pandora Avatar Land, 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 $7 billion and $8 billion during fiscal 2017, in a manner 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 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. 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. We expect 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. 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 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's investment cycle within its Parks and Resort segment is expected to increase capital spending to approximately $5.3 billion during fiscal 2017, which will temporarily hamper FCF generation during fiscal 2017. Fitch anticipates that Disney will generate in excess of $3.5 billion of annual FCF during the ratings horizon. Disney's strong portfolio of cable networks underlies 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. Fitch believes there is sufficient flexibility within the current ratings to accommodate slower affiliate fee revenue and operating income growth within this business. 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 MVPDs will remain a significant risk to its 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 revenue through the latest 12 months (LTM) Dec. 31, 2016), Consumer Products & Interactive Media, and the advertising portion of broadcast and cable networks (15% of total revenues). Should macroeconomic volatility return, we expect 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. 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 evolving media landscape, including the growing prominence of streaming services and digital content, will not have a material negative impact on Disney's credit profile or FCF over the intermediate term. Further, in Fitch's view, the proliferation of new over-the-top entrants and methods of consumption will continue to drive more demand for Disney's content. As to uncertainty around the continued ability of cable networks to pass increased programming costs on to distributors, Fitch believes it poses moderate risk to cable network providers over the longer term. Mitigants for Disney include Fitch's belief that the top-tier channels will retain leverage with distributors going forward. 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 mid-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 non-political 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. LEVERAGE AND FINANCIAL POLICY Fitch does not anticipate any meaningful changes to Disney's financial policy over the ratings horizon. We believe 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, Fitch believes 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, takes precedence over merger and acquisitions and shareholder returns. Disney's capital structure and credit protection metrics remain consistent and within Fitch's expectations for the current rating. Consolidated pro forma leverage of 1.2x as of the LTM ended Dec. 31, 2016 is in line with fiscal year-end 2016 and 2015 metrics. Going forward, leverage should range between 1x-1.2x during the ratings horizon after consideration for a modest increase in debt levels related to the higher level of share repurchases. 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. Share repurchases are anticipated 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 its first quarter of fiscal 2017. As of Dec. 31, 2016, the company had remaining authorization to repurchase approximately 267 million additional shares. 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 Dec. 31, 2016 pro forma for new 364-day credit facility) 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 $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 that is scheduled to mature during the remainder of fiscal 2017 ($1 billion matured in Feb. 2017) followed by $1.8 billion and $2.8 billion during fiscal 2018 and 2019, respectively. Fitch does not expect debt reduction going forward. Total debt as of Dec. 31, 2016 pro forma for subsequent debt issuances and maturities was approximately $21.5 billion and consisted of: --$2.3 billion of commercial paper (CP); --$18 billion of notes and debentures, with maturities ranging from May 2017 - 2093; --$1.1 billion of debt related to international theme parks, 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 (as of Dec. 31, 2016), including the debt related to the acquisition of UTV. FULL LIST OF RATING ACTIONS Fitch affirms Disney's ratings as follows: The Walt Disney Company --IDR at 'A'; --Senior unsecured debt at 'A'; --Senior unsecured revolvers 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 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 W Madison Street Chicago, IL 60602 Secondary Analyst Rachael Shanker, CFA Associate Director +1-212-908-0649 Committee Chairperson John Culver, CFA Senior Director +1-312-368-3216 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Date of Relevant Rating Committee: March 31, 2017 Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021590 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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