) on CreditWatch with negative implications, based on Standard & Poor's expectations of lower earnings and commensurately slower debt reduction in a now more difficult environment for the entertainment and theme park company.
Standard & Poor's expects downgrade potential will be limited to one notch, to the 'BBB' level. The 'A-2' short-term corporate credit and commercial paper ratings were affirmed and were not placed on CreditWatch.
The company has acknowledged that it will likely miss its earnings target of 25% to 35% growth for the year ending Sept. 30, which will likely translate into less debt reduction than Standard & Poor's had been relying on in maintaining the rating. Credit measures have been subpar for the rating since October, 2002, but Standard & Poor's had been closely watching the company's progress through a gradual business pickup. Although theme park attendance had begun to rebound in the quarter ended December, 2002, it has softened again as international tensions have mounted, and at a time when the company's high-attendance spring break season approaches. The ABC Television Network, the ABC owned and operated TV stations, and the ABC radio group, which had been experiencing rebounding advertising demand, now risk belt-tightening by advertisers, particularly during programs covering the conflict. The TV and radio stations' high margins magnify the effect of any revenue weakness.
Gross debt to EBITDA for the trailing 12 months ended Dec. 31, 2002, was 4.2 times, compared with the 3 times level Standard & Poor's views as appropriate for Disney at a 'BBB+' rating level. Including operating lease adjustments, securitization debt, Disney's obligations related to its 39%-owned Euro Disney parks, and contingent obligations, gross debt to EBITDA is 4.9 times.
Standard & Poor's will be monitoring the business environment and Disney management's response to difficult conditions, as well as its plans for debt reduction. Disney has strong asset flexibility and liquidity, despite nearly 50% of debt maturing in the next three years. The company has taken a number of cost-cutting and capital spending measures in the last two years. If the conflict is resolved shortly, advertising demand could still stabilize prior to the annual upfront advertising selling period for network TV and cable TV. From Standard & Poor's CreditWire