Fitch Downgrades Mattel's IDR to 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded Mattel, Inc.'s (Mattel) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and affirmed the Short-term IDR at 'F2'. A full list of ratings follows at the end of this release.

The company's $2.1 billion in senior unsecured notes outstanding at Sept. 30, 2015, and $1.6 billion revolving credit facility maturing in March 2020, will be affected by today's rating action.

The Rating Outlook is Stable.

The downgrade reflects a meaningful weakening in Mattel's credit protection measures since 2013 and Fitch's expectations that 2016 will be another tough year as the company loses the Disney Princess line. Mattel's leverage has increased more than one turn from 1.1x at the end of 2013 to 2.3x at the end of 2015. Fitch expects leverage to remain elevated at 2.3x next year before declining to around 2x in 2017. Further, FCF is expected to be modestly negative in 2016 given sales deleverage.

The company's debt is expected to remain roughly flat at $2.1 billion. Therefore the company will need EBITDA to revert back to its historical $1.4 billion level from approximately $931 million at the end of 2015, to see credit protection measures in the mid-1x range. The slate of Warner Brothers movies, and renewed license with Disney related to the Cars movie should help the top line. However, growth in Mattel's larger underlying brands such as Barbie and Fisher Price are also crucial. The impact of cost savings programs such as Funding Our Future to reduce overhead should also be helpful.

KEY RATING DRIVERS

Revenue Volatility/EBITDA Declines

While the company exited 2015 on an upswing, top line volatility in the past several years including the loss of the Disney Princess line will impact 2016. Mattel's EBITDA declined to $931 million at year end from $982 million in 2014 primarily due to the negative impact of foreign exchange, lower entertainment related revenues as well as Monster High sales. Leverage at the end of 2015 was 2.3x and will remain at these elevated levels in 2016.

Strong Studio Release Schedule Starting 2017

Mattel's licensing deals with Disney for 'Cars' and Warner Brothers monetization of its DC Comic IP with a spate of theatrical releases through 2020 should bolster Mattel's revenues. 'Cars' is a proven property and Fitch expects revenues from just this one property to add at least 3% to 2017's revenues based on historical performance.

Scale and Leading Market Position

Mattel is one of the largest manufacturers and marketers in the traditional toy industry globally with more than $5.7 billion in net revenues in 2015 and approximately 41% of revenues generated outside the U.S. It has leading brands with proven longevity, such as Barbie, American Girl and Hot Wheels.

Highly Seasonal and Uneven Cash Flows

Virtually all of Mattel's FCF (operating cash flow less capital expenditures and dividends) is generated in the fourth quarter coinciding with the holiday period as is typical for most toy manufacturers. Mattel's FCF has been modestly negative in two of the past three years. Fitch again expects modestly negative FCF near the $75 million range in 2016 before improvement to around $90 million in 2017.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Revenue declining approximately $300 million in 2016 to $5.4 billion due to the loss of the Disney Princess license as well as moderate impact from negative foreign exchange with revenues growing to nearly $6 billion in 2017 as the company's entertainment license schedule improves.

--Leverage remaining elevated at 2.3x in 2016, and improving to around 2x in 2017.

--Negative FCF negative of around $75 million in 2016 before turning around to around positive $90 million in 2017.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to an upgrade include:

Operating with leverage sustained below 1.5x while maintaining or growing shares in most of its larger core brands such as Barbie, Hot Wheels and Fisher-Price.

Future developments that may potentially lead to a negative rating action include:

Developments that could potentially lead to a negative rating action include a material and consistent loss of market share or a secular decline in the traditional toy industry and any debt financed share buybacks such that leverage is sustained over 2.25x.

LIQUIDITY

At the end of the 4th quarter and through the 2nd, much of the industry has considerable liquidity. The toy industry has highly seasonal revenues, profits and cash flows. Mattel's financing requirements is primarily driven by working capital requirements in the second half of the year. The company's key sources of liquidity are commercial paper which is supported by a $1.6 billion unused revolving credit facility maturity in 2020 and cash on hand.

The company's financial flexibility is strong given cash balances of more than $800 million at the end of each year in 13 of the past 14 years and a well laddered debt maturity schedule. Mattel's goal is to have at least $800 million of cash at year end to self-fund seasonal working capital peaks in the third and fourth quarter. Mattel has pulled back on discretionary activities to meet some of the more controllable aspects of its financial framework such as the $800 to $1 billion cash balance at year end. Mattel ended 2015 with $893 million of cash, meeting its public cash goals.

FULL LIST OF RATING ACTIONS

Mattel, Inc.

--Long-term Issuer Default Rating (IDR) downgraded to 'BBB+' from 'A-';

--Short-term IDR affirmed at 'F2';

--Commercial Paper program affirmed at 'F2'

--Unsecured bank facility downgraded to 'BBB+' from 'A-';

--Senior unsecured notes downgraded to 'BBB+' from 'A-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998903

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998903

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160202006691/en/

Fitch Ratings
Primary Analyst
Grace Barnett, +1-212-908-0718
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Committee Chairperson
Monica Aggarwal, CFA, +1-212-908-0282
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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