S&P Global Thursday lowered Walt Disney’s credit rating to A- (still at the higher end of investment grade) as the company’s theme parks and film and TV studios remain closed by social distancing orders and it’s unclear when they will be allowed to reopen.
The actual hit to operating performance so far will be revealed when Disney reports its January-March quarterly results May 5.
S&P said it doubts Disney theme parks will return to normal capacity at the same rate as the overall economy even after stay-at-home restrictions are lifted because of continued social distancing and consumer concerns about public events. As a result, S&P expects Disney’s leverage – or the amount of debt it carries relative to its cash flow – to climb for the next two years.
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The ratings agency also has the conglom on credit watch negative for the same reasons – uncertainty around when theme parks will reopen, the timing and strength of an economic recovery, and how Disney will be able to de-lever over the next few years beyond “operational actions” its taking – meaning things like furloughs and salary and cost cuts.
It could potentially reduce or cut its semi-annual dividend, alluded to in a Twitter rant this week by Abigail Disney, the grand-daughter of Roy. 0 Disney, who founded the company with brother Walt.
The COVID-19 pandemic has affected Disney the hardest of the global media and entertainment companies. Its shuttered theme parks accounted for about 30% of revenues and nearly 50% operating income. The two U.S. parks, cruise lines and Disneyland Paris closed in mid-March and parks in Shanghai and Hong Kong in late January. Like others in Hollywood, its film and TV studios cannot complete principal production on live action content nor put films into movie theaters, which mostly remain closed around the world.
ESPN is losing advertising revenues from both the overall advertising recession and the steep decline in audience ratings from the cancellation of live sports.
S&P Global said it expects to resolve the credit watch listing “as we get clarity on when the U.S. parks will reopen and what a post-COVID-19 world will look like.” S&P could lower the credit rating further if it no longer believe that the company can reduce leverage, or it could revise the outlook to stable if it sees a clear path for Disney to lower it – like theme parks reopening sooner than expected and attendance returning closer to 2019 levels. The agency said it will closely watch what happens when Disney reopens its Asian theme parks, which will likely be sooner than the reopening of the U.S. properties.
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