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Rating Action:

MOODY'S DOWNGRADES THE WALT DISNEY COMPANY'S SENIOR UNSECURED DEBT RATING TO Baa1 FROM A3. THE OUTLOOK IS STABLE.

18 Oct 2002
MOODY'S DOWNGRADES THE WALT DISNEY COMPANY'S SENIOR UNSECURED DEBT RATING TO Baa1 FROM A3. THE OUTLOOK IS STABLE.

Approximately $14 Billion of Debt Securities Affected.

New York, October 18, 2002 -- Moody's Investors Service has downgraded the senior unsecured debt ratings of The Walt Disney Company to Baa1 from A3. In addition, the ratings for its subsidiaries, Disney Enterprises and ABC, Inc. have been downgraded to A3 from A2, and the ratings of ABC Family have been downgraded to Baa2 from Baa1. The company's short term P-2 rating has been affirmed. The outlook is stable. This concludes the review for possible downgrade commenced on August 5, 2002.

The downgrade is driven by: (1) High financial leverage that results primarily from its debt financed acquisition of ABC Family and substantial block share repurchase in September 2001. (2) Recent performance declines of two of its most important businesses, parks and networks, as attendance at its parks have fallen due to economic pressures and fears over travel, and advertising demand at its networks have fallen due to ABC's diminished ratings and an anemic advertising environment. (3) Limited free cash flow versus debt service obligations and maturities over the next two years, and (4) The potential adverse impact on all lines of business if the U.S. enters a double dip recession, as well as possible travel disruptions in the event of a war or renewed domestic terrorist activity.

The stable outlook reflects Moody's expectation that the company will be able to gradually improve its operating and free cash flow through cost and capital spending containment and limited top line recovery, and reduce debt over the next eighteen months to bring credit statistics to levels that are acceptable for the Baa1 rating category. The sale of non-core properties, including its sports teams and portions of its radio group, may be necessary to achieve this target to the extent that operating performance is insufficient. Over the next eighteen months reduced capital expenditures and absence of share repurchase will contribute to improving free cash flow available to repay debt. The company's dominance in family and children's entertainment, and its top tier collection of cable channel, network, television, radio, studio, and park assets support the rating.

The increased risk profile is both a result of the adverse operating environment, and management's ill timed financial decisions over the last eighteen months. Management's decision to finance the acquisition of ABC Family entirely with debt, and its decision to purchase a block of equity in September 2001 weakened the balance sheet at the same time the operating environment grew increasingly uncertain. Subsequent asset sales and commitments to halt repurchase activity only partially mitigate this concern. While management has articulated a substantial de-levering plan, it largely hinges on top line growth and its effect on improving free cash flow and credit ratios.

Moody's believes that the ABC Network has begun taking the necessary steps to stem and ultimately reverse its slide from first to fourth in prime time ratings. However it is early in the season and much of the slate is new. ABC has made gains versus its spring season audience share in select time periods. ABC's revenues have benefited from robust up-front and spot advertiser demand, but ABC must consistently deliver viewer rating levels to realize these benefits. Moody's remains concerned that calendar 2003 will be more challenging given the absence of Olympic and political spending, concerns over the sustainability of now strong automotive spending, uncertainty over Iraq and terrorism, and the absence of a broad based advertising recovery. Aside from ESPN, advertising demand for its cable channels will likely remain weak. ABC Family's results have proven disappointing, as advertisers have disproportionately pulled away from low audience share, undifferentiated channels. Subscriber fees derived by its cable channels, that heretofore have held up well, may come under pressure as cable MSO consolidation forces pricing concessions. Cost pressures are expected to remain high during the next two years given high locked in sports programming rights.

Until the global economic and political climate improves Moody's expects that Theme Park attendance will not materially improve from current levels. Moody's believes visitation by long distance national and international visitors, which have higher per capita spending and longer stays than regional visitors, will likely remain depressed over the intermediate future. The theme park business has high fixed costs limiting management's ability to respond to soft demand, as a result margins and ROA are severely impacted by capacity declines.

While the Studio Entertainment division makes only a limited direct contribution to the bottom line, Moody's believes that the success of its animated theatrical productions is essential to maintaining and renewing the relevancy of Disney's characters which in turn drives the results of its parks, consumer, and other trademark properties.

Moody's believes that near term event risk is minimal. However, longer term the company may look to expand its television broadcast group, and has plans to make some modest investments in overseas park properties potentially limiting credit improvement. Moody's also notes that Disney's 39%-owned Euro Disney investment is leveraged. While Euro Disney's debt is non-recourse to Disney, the venture may require capital from Disney above and beyond the line of credit already extended. While additional third party capital is a potential source, Moody's believes it is possible that Disney could decide to provide an infusion to protect its investment and brand.

The Walt Disney Company, headquartered in Burbank, California, is a diversified international media and entertainment company.

New York
Robert Konefal
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Glenn B. Eckert, CFA
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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