Walt Disney Debt Rating Cut Over Theme Parks, Theatrical Outlook

Disneyland Theme Park
Mario Tama/Getty Images)

Shuttered ticket windows stand outside the Disneyland theme park in Anaheim on September 30, 2020.

Analysts forecast that Disney's operating performance at its two units "hardest-hit" by the coronavirus pandemic, theme parks and movie studios, will not return to 2019 levels until fiscal year 2022.

S&P Global Ratings has cut its debt rating on the Walt Disney Co. amid the financial challenges of the coronavirus pandemic, which means its theme parks and film units "continue to be severely affected."

"We forecast that Disney's operating performance at its two hardest-hit segments (theme parks and movie studios) will not begin to normalize (return to 2019 levels) until fiscal [year] 2022, ending Sept. 30," S&P analysts Naveen Sarma and Jawad Hussain wrote in their Wednesday report. "We no longer believe Disney can reduce leverage [as much as expected] by the end of fiscal 2022. Our original operating assumptions ... assumed an economic recovery from the pandemic in the latter half of 2020, with a return to more normalized operating activity at Disney's theme parks by the end of 2020."

They have a "negative" outlook on the debt, meaning they could downgrade their rating further in the future.

Reports that "experimental vaccines may be highly effective and might gain initial approval by the end of the year are promising," they said, but highlighted that "this is merely the first step toward a return to social and economic normality."

The S&P duo continued: "We anticipate that it could take all of fiscal 2022 for revenues at the theme parks and studio entertainment to return to pre-COVID levels. We do believe that earnings before interest, taxes, depreciation and amortization may improve somewhat faster because of the significant permanent cost reductions achieved throughout the entire Disney organization. These reductions will more than cover any additional costs associated with COVID-19 health and safety procedures."

Adding in increased cash flow losses from Disney's global streaming initiatives "likely keeps" adjusted debt leverage higher, the analysts concluded, predicting that "over the next two to three years, the company will need to make significant investments in new content, marketing, and systems to reap the advantages of global scale and reach profitability" in its direct-to-consumer business. They forecast that Disney's adjusted debt to earnings leverage will return to below three times only in fiscal year 2023.

They are also projecting that attendance at Disney's two U.S. theme parks in 2021 will amount to 50 percent of 2019 levels before improving to more than 90 percent of 2019 levels in 2022.