2020-03-26 The Hollywood Reporter

THE HOLLYWOOD REPORTER 18 MARCH 26, 2020

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Behind the Headlines

The Report

Disney, AT&T, theater chains and other majors carry high leverage ratios as one analyst says,

‘We worry most about Netflix’ BY GEORG SZALAI

Hollywood’s Crushing Debt:

‘Right Now, It’s About Liquidity’

A

mid the coronavirus

pandemic, Hollywood

giants face a catastrophic

earnings hit this year, and debt

burdens are in renewed focus as

ratings agencies are busy explor-

ing or handing out downgrades.

AT&T, for one, shelved a $4 bil-

lion stock buyback deal to boost

its financial flexibility, with

other companies expected to

follow suit. As of March 19, S&P

Global noted 23 virus-related

rating actions, which includes

downgrades, for North American

media and entertainment firms,

including the likes of Disney,

National Amusements, Endeavor

and its subsidiary UFC, AMC

Theatres and Cinemark. “Right

now, it’s all about liquidity,”

Moody’s analyst Neil Begley says.

Exhibitors are most at risk

from high debt burdens and

fixed costs, such as theater

leases, while revenue is wiped

out because of cinema closures.

Regal owner Cineworld, which

ended 2019 with $7.7 billion in

net debt, has warned that it could

potentially go out of business in

a worst-case scenario. Also at a

higher risk is Endeavor, which in

September withdrew the planned

IPO that was supposed to help it

reduce its $4.6 billion debt bur-

den. S&P’s estimate on March 16

was for a “mid-teens percent drop

in events, media, and services

revenue, as well as a substantial

decline in UFC’s live ticketing rev-

enue.” A downgrade would make

debt refinancing more expensive

and could pause any acquisitions.

ViacomCBS has the highest debt

leverage ratio among Hollywood

conglomerates, per Moody’s, and

box office contributes more to

its revenue than to anyone’s but

Disney’s, per S&P. ViacomCBS

controlling shareholder National

Amusements in early March

ended up in a technical violation

of the covenant for a bank loan

when the former’s stock price

dropped below the minimum level

required for the shares held as

collateral. NA got a waiver until

March 28 and as of March 24 was

in advanced talks about amending

its loan agreement. Former Wall

Street analyst Hal Vogel predicts

that the terms would likely be

“renegotiated to provide some

relief, but it is clearly uncomfort-

able.” ViacomCBS on March 18

delayed the sales process for its

CBS Black Rock headquarters,

which it hopes to sell for more

than $1 billion, while predicting

that a deal would close this year.

Meanwhile, Disney’s balance

sheet is seen as strong, but its

financials will be hit across more

divisions than those of its peers;

it operates film and network

units (ESPN is facing double-digit

ratings declines due to a lack of

live sports) plus a theme parks

division, and has the biggest

consumer products business. “In

the near term, Disney is taking by

far the biggest earnings hit due

to their park exposure,” Cowen

& Co. analyst Doug Creutz wrote

March 23, cutting his current-year

operating income estimate by

43.8 percent and revenue forecast

by 13.8 percent. Needham analyst

Laura Martin on March 13 cut her

earnings before interest, taxes

and amortization forecast for

Disney’s theme parks unit for the

fiscal year by 4 percent to $6.8 bil-

lion, her cable networks estimate

by 6 percent to $5.4 billion and

her film unit forecast by 2 per-

cent to $3.1 billion. On March 19,

Disney launched a $6 billion debt

offering, taking advantage of the

Federal Reserve’s latest interest

rate cut to boost its financial flex-

ibility. Moody’s Begley lauds it for

ensuring that the company “has

significant liquidity,” adding the

offering is “very smart. It’s like an

insurance policy.”

And while many on Wall Street

have contended that streaming

services will benefit from people

being at home, and one could

argue that Netflix’s cash burn

might fall as productions are

delayed, the company is saddled

with debt. Needham’s Martin in

a March 10 report argued that

“COVID-19 is bad for Netflix,”

including its efforts to reduce its

free cash flow losses. “In our cov-

erage list, we worry most about

Netflix, which has only $5 billion

of cash on the balance sheet” and

was expected to post about $3 bil-

lion in free cash flow losses in

2020, Martin explains. She added

that the streamer might be forced

to raise capital before the end of

the year, warning: “If the equity

and/or debt markets close for

any extended period, this could

represent a non-trivial problem

for Netflix.”

Showbiz Debt Download

Coronavirus Earnings Forecast

AT&T is saddled with the most liabilities, but its strong cash flow

means it has a better debt ratio than others

With theme park and theatrical exposure, Disney’s revenue may

take the biggest fall among the Hollywood majors

Company

Company

Debt

Revenue

Debt/EBITDA ratio

Operating

Earnings

Change From

Previous Year

2019 EBITDA

Change From

Previous Year

AT&T $219.7B $67.4B 3.3x

Disney $69.9B ↑0.4% $7.7B ↓44.5%

ViacomCBS $27.8B ↑0.1% $5.1B ↓7.2%

Fox Corp. $11B ↓1.2% $4B ↓15.3%

Lionsgate $3.9B ↑5% $0.5B ↓11.2%

Comcast $109.7B $35.4B 3.1x

Disney $59.9B $17.7B 3.4x

Netflix $16.5B $2.9B 5.6x

ViacomCBS $23.7B $6.1B 3.9x

Source: Moody’s. EBITDA: Earnings before interest, taxes, depreciation and amortization.

Source: Cowan & Co.

The closed gates of Disneyland in Anaheim

on March 16.

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