The spread of the Coronavirus – labeled a global public health emergency by the World Health Organization Thursday and routing the stock market heading into the weekend – is credit negative for U.S. media and entertainment companies, according to a report out by Moody’s this week.
Markets swooned Friday with the Dow Jones Industrial Average falling more than 600 points, or 2%, on fears that the virus would have far-reaching implications for the global economy.
The Moody’s report was came out Wed. before the U.S. had its first instance of human-to-human contagion (versus catching it from abroad) and when cases numbered 6,200. In the two days since, the closely watched toll stands at 10,000 with more than 200 deaths, all of the fatalities in China so far.
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U.S. health officials have quarantined 195 people evacuated from Wuhan, the epicenter of the outbreak, and Secretary of Health and Human Services Alex Azar called the illness an “unprecedented public health threat.” Evacuees are being held on an air force base in California under an order last used in the 1960s, according to news reports.
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The outbreak is already is already squeezing big media: Disney temporarily shuttered the Shanghai Disney Resort and Hong Kong Disneyland parks; movie theaters have gone dark in a country that rivals the U.S. in global box office revenue; and studios may need to postpone major movie releases, noted Moody’s analyst and senior VP Neil Begley. MGM’s upcoming James Bond film, No Time To Die, for instance, is set to open in April (in the U.S. and U.K., no release date had been announced yet for China.)
When the SARS epidemic hit that country in 2004, U.S. studios had few film distribution deals there.
Tech giants also have exposure. Apple has considerable exposure in Asia and CEO Tim Cook said on an earnings’ call this week the company is monitoring the situation closely. Apple provided a wider than usual range for its revenue forecast for fiscal 2020 because of the uncertainty.
Several Apple suppliers in Wuhan had to close and related businesses around the country have been working shorter hours. He said Apple had to close one of its retail stores and is cleaning the others locations frequently and physically taking the temperatures of employees regularly.
“Retail traffic has been impacted across the country,” Cook said.
It’s unclear how fast the contagion can be contained and since people can spread the virus weeks before having symptoms, steps to reduce exposure are becoming more severe.
The biggest disruption would come “if this becomes a bigger problem outside of China where you have multiple territories and the ability to screen a film is challenged,” Begley said. There are cases of the virus in other countries in the Asia-Pacific region, Europe, the Middle East and North America.
“We believe more diversified companies and those with strong credit profiles will likely be able to withstand the temporary impact. Less diversified and more leveraged companies with material exposure may be stretched beyond their capacity to absorb shortfalls and narrowing liquidity as time goes on,” the Moody’s report said.
If the virus spreads significantly beyond China, concerts, sports events and theaters suffer. Separately, advertising would take a hit. The biggest beneficiaries – “Not on purpose,” Begley hastened to say, might be streaming services Netflix, Disney+ and others.
Moody’s and other credit ratings agencies are meant to help investors determine the risk of putting money in specific companies by assessing creditworthiness, or ability to pay it back. The lower the rating, the more attractive terms companies need to offer to raise cash.
Of all the U.S.-based media companies, Disney currently has the most direct financial exposure to the Corona virus outbreak and contagion of the virus given its giant theme parks business and its 30%-plus share of the global box office. However, Begley noted, Disney only owns 43% and 47% respectively of the Shanghai and Hong Kong parks, which mitigates the downside.
U.S. studios take a lower percentage of box office receipts in China, which also reduces the hit.
And consolidation is a shield The farther a film studio or park is tucked into a giant corporate parent, the less the pain. That’s the case at NBCUniversal parent Comcast, WarnerMedia parent AT&T and to a certain extent Disney. All three have high and stable credit ratings.
Moody’s already had Lionsgate and MGM ratings under review for possible downgrades because of high debt.
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