The Walt Disney Co.'s ability to meet its debt payments was affirmed on Tuesday by a major credit ratings agency. But the entertainment giant's outlook is negative due to the continuing drag on business from a sluggish economy.
Standard & Poor's Ratings Service said it will keep Disney's long-term corporate credit rating at "A" and its short-term rating at "A-1."
S&P defines an "A" rating as one given to a company that has a "strong capacity" to meet its debt payments over time but it is more vulnerable to an economic downturn or a change in circumstances than companies that have the higher ratings of "AAA" or "AA."
S&P said the "A" rating reflects Disney's marquee name assets, extensive media reach, good cash flow and others.
Disney's short-term credit rating remains at "A-1," S&P's second highest in the category.
S&P reviewed Disney's corporate credit rating in August after the company said it was buying Marvel Entertainment Inc. for about $4 billion in stock and cash.
S&P analyst Deborah Kinzer concluded Tuesday that in spite of an increase in debt from the Marvel acquisition and weakness in most of Disney's businesses, the company has enough earnings and cash flow to meet the requirements of an "A" rating in 18 to 24 months.
But she put Disney's rating outlook at negative, meaning the rating could be cut. A lower rating generally makes it more expensive for companies to borrow money — in the form of higher interest rates — because of a weaker ability to repay debt.
Kinzer said she's concerned about the weakness in Disney's businesses, especially in film, due to the recession and the possibility it could make more acquisitions or resume big share repurchases. These actions would either drive up its debt or delay any lowering of debt levels.
The analyst noted that Disney's 2009 operating cash flow margin fell to 20 percent from 24 percent in the prior year despite cutting costs. She expects margins to further shrink without an economic rebound and for Disney to continue cutting expenses.
Shares of Disney, based in Burbank, Calif., fell 9 cents to $32.31 in afternoon trading.
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