Disney's Credit Rating Revised by Fitch Over Virus Impact

Disneyland Anaheim Park on March 14 2020 - H
David McNew/Getty

A closed Disneyland in Anaheim, California on March 14, 2020.

The firm says the pandemic "will materially weaken Disney's operating and credit profile over the near term."

Fitch Ratings has put The Walt Disney Company on credit watch, with a negative outlook, over concerns about how the Hollywood studio will weather the coronavirus outbreak in the near term.

Cutting the conglomerate's rating outlook from stable to negative, Fitch on Wednesday in a note said it expected "the coronavirus pandemic will materially weaken Disney's operating and credit profile over the near term (next two to three quarters)."

Fitch added Disney's businesses will "normalize gradually in step with the return of economic activity as the coronavirus threat diminishes. Fitch does not expect at this time that the short-term shock to Disney's business model will erode Disney's long-term credit quality reflected by the current 'A' IDR."

To reduce the impact of the COVID-19 virus, Disney this week said it will close all of its North American stores and the studio will also close Downtown Disney in Anaheim and Disney Springs in Orlando. Disney hotels in Walt Disney World and its Vero Beach Resort will also close by Friday.

At the same time, the ratings agency said efforts by Disney to reduce its debt load after acquiring assets from 21st Century Fox will fall short of earlier expectations from Wall Street investors and will put pressure on its current debt rating.

Drilling down, Fitch said Disney's Parks, Experiences and Product division will feel the greatest impact after the studio closed its domestic parks through to the end of March. "Fitch believes the parks' closure will likely be extended into Disney's fiscal third quarter significantly reducing revenue and increasing operating losses," the ratings agency said.

Last week, Disney said all of its North American parks and Paris park would be closed until at least the end of the month. The nearly unprecedented move came as pressure on the national, state and local level was being applied to businesses to help fight against the spreading coronavirus.

The studio's media networks business should see advertising revenue, especially at ESPN, fall after a slew of professional and college sports leagues canceled games and other live events amid the virus outbreak. And Disney's film studio will see revenues fall as exhibitors shut down their domestic chains, Fitch said.

The ratings agency did caution the disruption at Disney will be "short-term" and business will eventually return given the studio's theme parks, film and TV studios and media assets are competitive.

"Fitch believes that Disney has the financial flexibility and capacity to withstand the impact of the coronavirus pandemic," the ratings agency said as the company pivots from traditional linear to a direct-to-consumer business model.