MOODY'S ASSIGNS (P)A2 RATING TO SENIOR LONG-TERM DEBT SHELF REGISTRATION OF THE WALT DISNEY COMPANY, AND ASSIGNS P-1 COMMERCIAL PAPER RATING
New York, 3/8/1996 -- Moody's Investors Service assigned a (P)A2 rating to The Walt Disney Company's (formerly DC Holdco, Inc.) senior unsecured debt shelf registration and a P-1 short-term rating to the company for its commercial paper. Moody's also confirmed the A1 senior unsecured debt ratings of its subsidiary Disney Enterprises, Inc. (formerly The Walt Disney Company) and downgraded the senior unsecured debt ratings of the subsidiary Capital Cities/ABC, Inc. to A1 from Aa3. Moody's P-1 short-term ratings of Disney Enterprises, Inc. and American Broadcasting Company (a unit of Capital Cities/ABC, Inc.) are withdrawn as their commercial paper programs have been discontinued. These actions conclude a review of the companies' ratings initiated in July, 1995 when their plan to combine was announced, and reflect the increase in debt at the consolidated company needed to acquire Capital Cities/ABC's common shares. Approximately $2.5 billion of debt securities of Disney Enterprises and $500 million of debt securities of Capital Cities/ABC are affected. Further, we anticipate that Walt Disney will issue commercial paper amounting to about $8.5 billion over the next several days to fund its acquisition of Capital Cities/ABC. Following the initial funding, we expect Disney will begin to refinance some of its commercial paper with longer term securities issued under a $5 billion shelf registration.
Moody's new and revised ratings reflect both the capital structure of Walt Disney as well as its corporate organization structure. All of the debt required to finance the acquisition of Capital Cities/ABC will be issued by Walt Disney, a holding company which has Disney Enterprises and Capital Cities/ABC as its two main subsidiaries. Long-term debt (not commercial paper) will remain outstanding at the two subsidiary companies, and there will be no indenture covenants limiting the amount of future debt to be issued at these entities. There are also no cross-corporate guarantees of debt between the three related issuers. The lower debt ratings of Walt Disney as compared to its two subsidiaries recognizes the effective structural subordination of creditors holding debt at the parent level versus the operating subsidiary level.
Despite a reduction in debt protection measurements and overall financial flexibility because of the substantial debt increase, we believe that the new consolidated Walt Disney Company will remain well-positioned from a credit perspective. The Capital Cities/ABC acquisition increases the diversification of its revenue and cash flow sources: operations now include major entertainment, theme parks, consumer goods, network and local broadcasting, and publishing segments. In addition, its future competitive position should remain relatively strong in a rapidly changing media and entertainment operating environment based on its dual control of major entertainment content creation and content distribution players. Also factored into our ratings is Walt Disney's ability to generate substantial free cash flow in future periods and management's intention to use this free cash flow to achieve significant debt reduction over the intermediate-term.
We maintain a stable outlook for the three issuer's debt ratings. The strengths outlined previously are balanced by several risks going forward including our perception that company management is now somewhat less risk-averse than in the past, and may be more tolerant of undertaking other sizable acquisitions and investments resulting in slower future debt reduction than is currently anticipated. The current ratings incorporate the expectation that Walt Disney may pursue limited investment or stock repurchase activities going forward. In addition, although financial performance should be stabilized somewhat by increased operation diversity, the Capital Cities/ABC acquisition also introduces a substantial new revenue stream subject to significant variation related to national and local advertising cycles as well as audience ratings. Moreover, competitive environments are rapidly changing in the entertainment content delivery business (new broadcast and cable television networks competing for advertisers' spending, new distribution technologies such as direct broadcast satellite) and the entertainment content creation business due to the formation of new studios and increased production by existing studios and other content providers.
The Walt Disney Company, headquartered in Burbank, California, is a diversified international entertainment company. Its subsidiary Disney Enterprises, Inc. operates filmed entertainment, theme park and consumer goods segments. Its subsidiary Capital Cities/ABC, Inc. operates television and radio broadcasting and newspaper and magazine publishing segments.
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