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Outsized compensation in New Disney note
admin | June 28, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
As the search for yield continues in high quality paper, it is worth highlighting the DIS 7.125% 4/8/2028 (New Disney notes) as a good buy candidate given the sizable g-spread pick up relative to DIS 2.95% 6/15/2027 (TWDC notes). The current spread differential of roughly 58 bp is more than enough compensation for the New Disney notes’ high dollar price in the $132 area, and non-index eligible deal size of $194 million. For comparison purposes, the trading differential in Comcast (CMCSA – (A3/A- (n)/A-)) index eligible to non-index eligible paper is roughly 20 bp tighter: the CMCSA 3.3% 2/1/2027 notes are trading at 81 bp g-spread, while the CMCSA 8.5% 5/1/27 notes are only 38 bp back at approximately 119 bp g-spread.
Exhibit 1: Single A – cable / media 7-year to 20-year curve
Source: Bloomberg, Amherst Pierpont Securities
Committed to ratings
When DIS acquired Twenty-First Century Fox, Inc. (21CF), which closed on 3/21/19, management chose to use cash proceeds from assets sales in an effort to reduce overall cash requirements associated with the deal and preserve its ratings. DIS used the approximate $15.3 billion in proceeds from 21CF’s sale of its Sky plc stake to help fund a portion of the cash component. As such, leverage only rose from 1.2x to roughly 2.6x currently. DIS has also earmarked the $9.6 billion in proceeds from the sale of its Regional Sports Network (RSN) for debt reduction when it closes. Pro forma the RSN sale, leverage will decline to the 2.2x area. DIS will refrain from share repurchases providing for roughly $6.5 billion of cash annually that will be used for debt reduction. Estimates are that DIS could bring leverage to the 1.7x area within 2 years of closing the transaction. This does not include cost synergies of $2 billlion that management has forecast by year two after the close.
Structure and debt exchange
As part of the June 2018 amended merger plan, The Walt Disney Company (TWDC) and 21CF became wholly owned subsidiaries of the New Disney. The New Disney is the parent and will be the issuing entity going forward. The New Disney and the existing TWDC debt will be unconditionally cross guaranteed. In an effort to simplify its capital structure, DIS conducted an exchange for any and all 21CF bonds ($18.13 billion) into New Disney notes. Participation was high in the exchange with the majority of tranches achieving a 95% or higher participation rate. The 21CF debt that was not exchanged does not benefit from the aforementioned cross guaranty structure. As such, Moody’s has withdrawn its ratings on the remaining 21CF debt.
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