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New York, October 31, 2022 -- Moody's Investors Service ("Moody's") affirmed all of The Walt Disney Company's (Disney) credit ratings, including its A2 long term senior unsecured ratings, its Prime-1 short term rating, and its wholly owned subsidiary Disney Enterprises Inc.'s A1 long term debt rating. The outlook remains stable.
..Issuer: Walt Disney Company (The)
....Senior Unsecured Regular Bond/Debenture, Affirmed A2
....Senior Unsecured Bank Credit Facility, Affirmed A2
....Senior Unsecured Commercial Paper, Affirmed P-1
..Issuer: Walt Disney Company (The) (Old)
....Senior Subordinate Shelf, Affirmed (P)A3
....Junior Subordinate Shelf, Affirmed (P)A3
....Subordinate Shelf, Affirmed (P)A3
....Senior Unsecured Shelf, Affirmed (P)A2
....Pref. Shelf, Affirmed (P)Baa1
....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2
....Senior Unsecured Regular Bond/Debenture, Affirmed A2
..Issuer: Disney Capital Trust I
....Pref. Stock Shelf, Affirmed (P)A3
..Issuer: Disney Capital Trust II
....Pref. Stock Shelf, Affirmed (P)A3
..Issuer: Disney Capital Trust III
....Pref. Stock Shelf, Affirmed (P)A3
....Senior Unsecured Regular Bond/Debenture, Affirmed A1
..Issuer: Walt Disney Company (The)
..Issuer: Walt Disney Company (The) (Old)
..Issuer: Disney Capital Trust I
..Issuer: Disney Capital Trust II
..Issuer: Disney Capital Trust III
Disney's A2 rating is supported by its diverse media and entertainment business segments, the strongest brands and franchises in the industry and robust free cash flow generation under normal operating conditions and non-heavy investment periods. Its large portfolio of iconic brands and franchises and ability to exploit them through film, television, theme parks, consumer products, and video game licensing positions the company as the leader in global media and entertainment. Disney is well positioned for the industry transition from traditional linear television viewing to direct-to-consumer video on demand streaming. Disney's leverage remains temporarily higher than what Moody's considers acceptable for the company's A2 rating because of the debt it took on to complete the acquisition of Twenty-First Century Fox, Inc.'s (Fox) entertainment assets, because of the material earnings pressure from the significant temporary business disruptions due to the pandemic, and due to the impact from the heavy investments in content to grow the company's streaming platforms including foregoing some licensing of content to third parties. Generally, Disney's businesses have recovered well, and management remains committed to its historically conservative financial strategies. Moody's expects the company will reduce leverage back in line with its historical norm over the next couple of years. Moody's measured approach to evaluating Disney's credit profile considers the company's strong liquidity, demonstrated commitment to a conservative financial policy, and our expectation that Disney's earnings will recover as the effects of the pandemic such as on theatrical film attendance will wane without any long-term harm to its diverse businesses.
Following the company's acquisition of Twenty First Century Fox, the company's leverage was elevated. Pre-COVID-19, Moody's expected Disney's adjusted debt-to-ebitda leverage would decline back to under 2.25x (level appropriate for its A2 long term debt ratings) by the end of calendar 2022. However, the deleveraging has been delayed given the steep pandemic related business disruptions to many of the company's important business segments and some of which are lingering through calendar 2022 (i.e. theatrical box office). With the effective shut down of several of the company's segments, leverage spiked significantly in fiscal years 2020 and 2021 and then declined as these segments reopened to strong demand. Moody's current Net debt-to-EBITDA leverage (including the Hulu debt adjustment of $5.775 billion) as of the last twelve months ended 7/2/2022 was 3.4x, while gross leverage was 4.1x. Moody's anticipates Disney's gross leverage to decline to around 3.5x by the end of fiscal 2022 (3.2x excluding the Hulu debt adjustment), falling below 3x in fiscal 2023, though there remains significant uncertainty surrounding this forecast given the potential for macro pressures.
The stable outlook reflects our view that Disney management will continue to take strenuous steps to mitigate any lingering effects from the pandemic and investment losses into direct-to-consumer (DTC) streaming television and sustain strong liquidity in light of the material temporary impact on cash flows. It also considers management's commitment to returning credit metrics to levels consistent with its A2 long-term debt ratings, though the pandemic effects are likely to mean it will take longer than previously expected to get there. Moody's believes that the company will continue to reinvest aggressively in content IP, technology and businesses most likely to benefit from changing consumer media and entertainment consumption trends such as its direct-to-consumer streaming platforms which benefited from the consumer lock downs. But the company is also investing across all its other sub segments including domestic and international parks and its cruise line. The outlook also reflects our confidence in management's commitment to its credit ratings, particularly given the company's statement that it will suspend share repurchases and dividends until leverage is reduced and credit metrics return to levels consistent with its A2 credit ratings. The suspension of dividends materially underscored Disney's commitment to its A2 credit profile and restoring its credit metrics to pre-Twenty First Century Fox acquisition levels. Moody's believes that dividends and share repurchases will remain part of Disney's long-term capital allocation strategy once credit metrics are well positioned again.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While highly unlikely over the next several years due to continuing elevated financial leverage, Moody's would consider an upgrade if Debt-to-EBITDA (including Moody's adjustments) leverage is sustained below 1.5x and free cash flow-to-EBITDA increased above 35%. A strong commitment from the company's management and board of directors to these stronger metrics would also be necessary for consideration of a higher rating.
A downgrade could occur if the pandemic residual effects or other events pose long-term sustained harm to the company's businesses and indefinitely constrains the company's operations, or management adjusts its financial policies and strategies, becoming less conservative such as not remaining committed to keeping leverage below 2.25x (including Moody's adjustments).
Disney's liquidity profile is very strong. Liquidity had been the first priority of management early in the crisis and still today. Moody's expects the company to rely on its strong liquidity to repay debt as it comes due and fund any and all obligations. As market access became robust in 2021, the extreme level of liquidity has been pared down along with bank revolver commitments. Its $12.25 billion of current bank revolver commitments expire in March 2023 ($5.25 billion), March 2025 ($3.0 billion) and March 2027 ($4.0 billion). These facilities support the company's $12.25 billion commercial paper program, under which there was $1.7 billion outstanding at 7/02/2022. Access to the company's credit facilities is restricted by a minimum consolidated EBITDA to interest expense covenant of 3 times, and we expect Disney will maintain sufficient headroom within the covenant. In response to the disruption of its operations due to COVID-19, Disney also suspended its semi-annual dividend payments of approximately $1.5 billion each. Although free cash flow generation is expected to remain depressed relative to pre-covid levels until 2024 and beyond due to investment in DTC streaming and other capital investments, Moody's expects the company's $13 billion of balance sheet cash at the end of its third fiscal quarter 2022 and full availability under its $12.25 billion revolving credit facilities will provide sufficient liquidity to cover short-term debt maturities, which includes about $1.5 billion of debt maturing in FY 2023.
The Walt Disney Company's ESG Credit Impact Score is positive (CIS-1). The company's exposure to environmental and social risks are considered manageable. However, the company has a strong history of conservative financial policies, excellent strategic and innovative leadership, and consistent credibility which overall is considered to have a positive impact on the rating.
The Walt Disney Company's exposure to environmental risks is neutral-to-low across all categories (E-2). The nature of its media and entertainment activities, with limited exposure to physical climate risk and very low emissions of pollutants and carbon, results in low environmental risk. Its Issuer Profile Score is therefore Neutral-to-Low, in line with exposures of the media industry.
The Walt Disney Company's social risks are neutral-to-low (S-2). The company does have some television networks and stations that face moderate risks from social and demographical trends as consumers move to direct-to-consumer video-on-demand services and drop their traditional linear bundled pay TV service. However, the company is very diversified in the media, entertainment and leisure sectors, and is transitioning to its own proprietary direct-to-consumer television streaming video platforms very successfully which mitigates that risk.
The Walt Disney Company exposure to governance considerations positions it strongly, with material credit benefits (G-1). It has strong corporate governance practices, a successful track record and generally conservative financial policies.
ESG Issuer Profile Scores and Credit Impact Scores for the rated entity/transaction are available on Moodys.com.
The Walt Disney Company ("Disney"), with its headquarters in Burbank, California, is a diversified worldwide media and entertainment company operating under two main business segments (as a percentage of fiscal year LTM 2022 revenues): Media and Entertainment Distribution (DMED) (65% of revenues and 34% of EBITDA) and Disney Parks, Experiences & Products (DPEP) (35% of revenues and 66% of EBITDA). As of the last twelve months ended 2 July, 2022, revenues totaled $81.1 billion.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions .
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