Fitch Affirms Disney's IDR at 'A'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) assigned to The Walt Disney Company (Disney) and its subsidiaries. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release. Approximately $16.5 billion of debt outstanding as of Dec. 27, 2014 is affected by Fitch's action.

KEY RATING DRIVERS

--Disney's operating profile positions the company to generate free cash flow (FCF) in excess of $4 billion annually, which coupled with strong liquidity and solid credit metrics, provides the company with considerable financial flexibility at the current ratings. Fitch expects the company to concurrently deploy cash for share repurchase and moderate M&A activity.

--The ratings incorporate Fitch's expectation that the company's share repurchase and M&A activity will likely exceed FCF generation.

--Disney is uniquely positioned, relative to its peers, to capitalize and monetize its internally or externally developed franchises and brands across the company's various business segments and platforms, which in turn strengthens the company's operating and credit profile and provides Disney with a sustainable competitive advantage.

--Disney's strong portfolio of cable networks, ESPN in particular, underlines the company's ratings. Disney's operating profile benefits from the stable, 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.

--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.

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's operating profile positions the company 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 $4.8 billion during fiscal 2015 ($4.4 billion net of Shanghai Disney Resort partner contributions), which will temporarily hamper FCF generation during fiscal 2015. Fitch anticipates that Disney will generate in excess of $4 billion of annual FCF during the ratings horizon.

Fitch does not anticipate any meaningful changes to Disney's financial policy over the ratings horizon. Fitch believes 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. 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 repurchase and M&A activity will likely exceed FCF generation. Disney repurchased approximately 15 million shares of its common stock for $1.3 billion during the quarter ended Dec. 31, 2014. The company's board of directors increased the share repurchase authorization to 400 million shares on Jan. 30, 2015.

Disney's capital structure and credit protection metrics remain consistent and within Fitch's expectations for the current rating. Consolidated leverage of 1.12x as of the latest 12 months (LTM) period ended Dec. 27, 2014 is in line with fiscal year-end 2014 metrics. Going forward, Fitch believes leverage will range between 1.0x and 1.4x during the ratings horizon after consideration for a modest increase in debt levels related to the higher level of share repurchases.

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 the largest 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 onto 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 revenue through the LTM period ended Dec. 27, 2014), consumer products (8%), and the advertising portion of broadcast and cable networks (16%). 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. Disney's Studio Entertainment segment reported record results during fiscal 2014. Disney's strategy within its Studio Entertainment business is to focus on generating content with franchise potential and to leverage existing franchises through multiple distribution windows. The focus on its highly profitable core franchises tends to drive revenue growth across Disney's business platforms. While the strategy helps mitigate the high volatility of the Studio Entertainment segment, the ratings incorporate Fitch's expectation that the Studio Entertainment segment will remain more volatile relative to the company's other businesses given the hit-driven nature.

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 Internet-based and time shifted television content will not have a material negative impact on Disney's credit profile or FCF over the intermediate term. For example, approximately 71% of ESPN's telecast hours are live and coveted by advertisers. The live programming blunts the effects of time-shifted viewing (96% of ESPN programming is viewed live) and ad-skipping. Further, in Fitch's opinion, the proliferation of new over-the top entrants and methods of consumption will continue to drive more demand for Disney's content. Fitch believes the uncertainty around the continued ability of cable networks to pass increased programming costs onto the distributors 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.

Disney's liquidity position and financial flexibility remain strong and is supported by significant FCF generation as well as $6 billion of aggregate available borrowing capacity (as of Dec. 27, 2014) under three credit facilities. Commitments under these credit facilities support the company's $6 billion commercial paper program and expire during March 2016 ($1.5 billion), June 2017 ($2.25 billion) and March 2019 ($2.25 billion). In addition, the company had approximately $5.1 billion of cash on hand as of Dec. 27, 2014. Scheduled maturities are well laddered and manageable considering FCF generation expectations and access to capital markets.

Disney does not have any debt scheduled to mature during the remainder of fiscal 2015. Approximately $800 million of debt matured during February, 2015. Approximately $2 billion of debt is scheduled to mature during fiscal 2016. Fitch does not expect debt reduction going forward.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--The revenue growth within the company's cable networks business (Disney's Media Networks segment) reflects the stability of the business and expected affiliation fee increases. Fitch anticipates high single to low double digit affiliation revenue growth.

--Programming expenses are expected to increase high single to low double digit driven by sports rights costs.

--Fitch assumes typical volatility within the Studio Entertainment, Parks and Resort and Consumer Products operating segments.

--From a margin perspective, the base case assumes modest margin expansion 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 to increasing programming costs. Disney's investments within its Parks and Resort segment lead to higher margins within its domestic business. Studio Entertainment margins remain relatively consistent.

--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 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 as of Dec. 27, 2014 was approximately $16.5 billion and consisted of:

--$2.8 billion of commercial paper (CP);

--$12.7 billion of notes and debentures, with maturities ranging from February 2015 - 2093;

--$253 million of debt related to Hong Kong Disneyland (as of FYE14), which is non-recourse back to Disney but which Fitch consolidates under the assumption that the company would back the loan payments;

--Approximately $530 million of foreign currency-denominated debt (as of FYE14), including the debt related to the acquisition of UTV.

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 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982127

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Fitch Ratings
Primary Analyst
David Peterson
Senior Director
+1-312-368-3177
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Timothy Lee
Associate Director
+1-512-215-3741
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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