Fitch Ratings has downgraded several categories of Disney evaluations, including the Long-Term Issuer Default Rating (IDR) assigned to The Walt Disney Company and its subsidiaries to ‘A-‘ from ‘A’.
At the same time, Fitch has downgraded the company’s Short-Term IDR and CP ratings to ‘F2’ from ‘F1’. In addition, Fitch has downgraded the senior unsecured issue ratings to ‘A-‘ from ‘A’. The Rating Outlook on the Long-Term IDR remains Negative. Approximately $55.5 billion of debt outstanding as of March 28, 2020 is affected by Fitch’s action.
The downgrades are based on Fitch’s assessment of Disney’s financial flexibility. The ratings giant also said it anticipated a “sharp and meaningful rebound” once pandemic conditions eased.
“Fitch believes the coronavirus pandemic will have a broad influence on Disney’s operating profile, but that the company’s Parks, Experiences and Product segment will bear the brunt of the impact due to ongoing park closures,” said Fitch’s statement. Fitch believes park closures will likely result in “significant revenue contraction and operating losses.”
Fitch’s base case assumes domestic parks reopen on or about July 1, subject to guest density and park capacity limitations.
Disney’s Media Networks business will also experience advertising revenue declines stemming from the cancellation of professional and college sports leagues. Additionally, Studio Entertainment segment revenues will decline, reflecting the disruption of the theatrical exhibition window.
Fitch’s ratings actions were undertaken by the expectation that the coronavirus pandemic will materially weaken Disney’s operating and credit profile through the remainder of the company’s fiscal year 2020 and into its fiscal year 2021.
While Fitch recognized Disney’s efforts to mitigate the impact of the pandemic on its operations and bolster liquidity, the businesses and cash flow generation will not meet initial expectations. That will negatively impact credit protection metrics over the rating horizon.
Fitch indicates Disney’s total leverage (defined as total gross debt with equity credit to operating EBITDA) will spike to over 6.0x at fiscal year-end 2020 (September) before trending down to approximately 2.2x by the end of the company’s 2022 fiscal year-end. That’s anticipating that economic activity will ramp-up as the pandemic eases, although the time line is uncertain on that.