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Figment!
03-22-2007, 08:02 PM
Fitch Upgrades Disney to 'A-'; Outlook Stable


Fitch Ratings
3/22/2007

Fitch Ratings upgraded The Walt Disney Company's (Disney) Issuer Default Rating (IDR) and senior unsecured debt rating to 'A-'. The company's commercial paper (CP) program rating was affirmed at 'F-2'. Approximately $12.3 billion in consolidated debt is affected. The Outlook is Stable.

The Walt Disney Company

--Issuer Default Rating (IDR) upgraded to 'A-' from 'BBB+';
--Senior unsecured debt upgraded to 'A-' from 'BBB+';
--Commercial paper affirmed at 'F2'.

Capital Cities/ABC Inc.

--IDR upgraded to 'A-' from 'BBB+';
--Senior unsecured debt upgraded to 'A-' from 'BBB+'.

Disney's ratings continue to reflect the company's leading market positions in core businesses, unique brand franchises, healthy operating EBITDA margins, strong conversion of EBITDA to free cash flow, and significant financial flexibility. The company has benefited from cyclical improvements related to the theme park business, solid growth in ratings and advertising at ABC Broadcasting, success in leveraging its content across multiple distribution platforms, and management's focus on strengthening the company's credit profile over the past several years. Credit concerns center on the volatility of its theme parks and resorts, studio and broadcast networks businesses, and secular challenges facing some divisions, namely the film studio and broadcasting businesses. Also, while credit metrics have improved from already strong levels, share repurchase activity has been aggressive and would be a more meaningful concern if sustained at similar levels while operations were enduring pressure.

Given the relatively flat credit curve, unprecedented supply of capital available in the market place, and heightened risk of shareholder activism, Fitch has questioned whether media companies have an incentive to retain a strong investment grade credit profile in this environment. Also, Fitch is cognizant that Disney's operating performance has been bolstered by cyclical and hit-driven strength. In addition to Fitch's increased comfort with management's commitment to retaining an 'A-' credit profile, Fitch focused its analysis on structural changes that better position the company for the next downturn: leadership changes, operational changes in volatile businesses, and better peak performance than previously expected.

First, Fitch believes that current leadership's operating philosophy and financially conservative nature incorporates past experiences from the earlier half of the decade, including enduring the impact of a drought of hits at the ABC network; a geo-political stress event (9/11) and subsequent cyclical downturn; an expensive capital structure altering acquisition (Fox Family); and event risk in the form of board room dissension and an acquisition attempt by Comcast. Also Fitch has gained comfort that in addition to the changes described below, the company's focus on cultivating and leveraging its global brand in the consumer marketplace is also translated to its approach to the financial markets. Fitch believes that management values the company being perceived as having a solid credit profile and understands that this may come at a cost periodically when the equity markets may penalize the company for not having a more aggressive mix of debt and equity in the capital structure.

Next, Fitch believes that the company has made prudent changes to its strategy and has improved execution at the more volatile business lines: the studio, theme parks and ABC. At the studio, Fitch believes Disney's decision to scale back the number of movies and focus on family entertainment that can be leveraged through the portfolio has proven to be a prudent strategy. Fitch believes that there are opportunities to drive additional upside at the parks through the company's efforts to cross collaborate rather than operating the parks as stand alone businesses. Also, Fitch believes that management at ABC has been aggressive at exploring alternative revenue opportunities for the company's content while remaining focused on costs. Management has also selectively pruned traditional media assets (like ABC radio), which have partially reduced consolidated business risk. Fitch continues to believe that prospects for Disney's core ESPN franchise remain very strong.

Finally, the cyclical and hit driven-peak performance has exceeded Fitch's prior expectations regarding the top of the cycle. Even with aggressive repurchases, Fitch believes the financial stresses required to impair the company's financial flexibility are consistent with an 'A-' rating. However, Fitch remains cognizant that ratings are largely within management's discretion and bondholder protection and event risk will likely continue to be correlated with equity prices. Over the past year, event risk has been low as Disney's stock price has appreciated more than 40% in the 15 months since Jan. 1, 2006. Fitch expects Disney will continue to demonstrate the difficult balance of being operationally aggressive in adapting to the evolving landscape while maintaining a conservative balance sheet.

For the latest 12 months (LTM) ended Dec. 30, 2006 consolidated gross (recourse and non-recourse) debt to operating EBITDA (excluding dividends from minority interests) was 1.6 times (x); while net recourse debt to EBITDA was near 1.0x. Free cashflow (after dividends) to gross debt was 25%. The company's financial metrics presently place the company comfortably within the 'A-' rating category and offer the company flexibility to address secular challenges facing its businesses, return capital to shareholders, make prudent (in terms of both size and strategy) acquisitions, and endure a cyclical downturn.

Disney's liquidity is solid with more than $2.4 billion of cash and strong free cash flow of approximately $4.1 billion generated during LTM ended Dec. 30, 2006. Liquidity is enhanced by bank facilities totaling $4.5 billion, which support the company's $4.5 billion CP program (availability as of Dec. 30, 2006 was $3.6 billion reflecting letters of credit and CP balances). The bank facilities consist of a $2.25 billion senior unsecured revolver expiring in February 2010 and a $2.25 billion senior unsecured revolver expiring in 2011.
The facilities have minimal covenant protections. They contain a financial covenant of 3x minimum EBITDA to interest coverage and cross-default on principal greater than $250 million. The facilities do not contain any credit ratings-based defaults or covenants specifically relating to a material adverse change in Disney's financial condition. Consistent with many other investment grade bond indentures Disney's indentures contain no significant protections from potential leveraging events.

The capital structure includes $1.32 billion convertible senior notes due in 2023. Fitch assigns these securities to class A (100% debt, no equity) as defined under Fitch's recently updated hybrid securities guidelines (published October 2006). Per Fitch's guidelines, these units are not considered mandatorily convertible units, and the underlying notes rank as senior notes (meaning that there is no loss-absorption benefit).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.