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DIS taking advantage of rates to fund a tender

| September 6, 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.

The Walt Disney Company tapped the market the first week of September for $7 billion in conjunction with an announced tender offer. After completing the Twenty-First Century Fox acquisition, the company was left a higher weighted average coupon than peers, such as Comcast and AT&T, despite having a lower weighted average maturity. Management will also be looking to repay a $3.175 billion outstanding revolver with the proceeds. The tender is attractive given that tender spreads are on average 20-25 bp tighter than pre-tender trading levels, with the most attractive spread premiums corresponding to the highest coupons.

New issuance helps streamline capital structure

DIS’ capital structure was littered with high coupon bonds after completing the Twenty-First Century Fox (21CF) acquisition earlier this year. At the time of the acquisition, DIS exchanged the 21CF bonds into New Disney bonds with the same coupon and tenors. With the addition of the 21CF exchanged debt, DIS maintains a higher weighted average coupon than peers, despite having a lower weighted average maturity. Prior to the new deal/tender announcement, DIS’ weighted average coupon was 4.61% on a weighted average maturity of 8.27 years. This compares with a 4.19% coupon/12.44 years at Comcast (CMCSA- A3/A-/A-) and 4.27% coupon/13.29 years at AT&T (T – Baa2/BBB/A-).

While the participation rate for the 21CF exchange was high at over 95%, it left $671 million of 21CF debt outstanding. The weighted average coupon associated with the outstanding 21CF debt is very high for a single A credit at 5.86% with a weighted average maturity of 11.94 years. Additionally, management will also be looking to repay the $3.175 billion outstanding under the revolver with proceeds from the debt issuance.

The tender offers

DIS launched two tender offers to clean up the balance sheet. The first tender offer is across 13 series of DIS notes, with a combined principal outstanding of $7.92 billion, and a maximum tender cap of $1.75 billion. The tender has acceptance priority levels with DIS targeting its 8.25% 2096 and 7.9% 2095 bonds as acceptance priority levels 1 and 2, respectively.  The rest of the priorities target coupons in the 5.4%-8.45% range, with no maturity shorter than 2034. While the majority of the bonds on the priority list trade with little regularity, tender levels on average appear to be roughly 20-25 bp tighter than pre-tender levels. It is important to note that tender spreads include a $3 point early tender premium per bond. The early tender expiration date is set for 5pm NYC time on September 16, 2019, with the fixed tender spread reduced by the $3 point premium after the expiration date.

Exhibit 1: DIS note tender – $1.75 billion tender cap

Note: *Tender spread includes $3 early tender premium per bond. Source: Disney reports, Amherst Pierpont Securities

The second tender is an any and all tender offer for the $671 million of 21CF bonds that were not exchanged. Participation was high in the exchange, leaving stubs outstanding. The 21CF bonds are even more illiquid than the DIS notes, making it nearly impossible to calculate the spread premium associated with the tender offer. Holders who missed the exchange can now have their bonds tendered to get out of an illiquid subsidiary that will not be issuing going forward.  As with the DIS note tender, the any and all tender spreads contain a $3 point early tender premium per bond, with the same expiration date.

Relative value

The tender is attractive given that tender spreads are on average 20-25 bp tighter than pre-tender trading levels. However, holders looking to participate in the tender should tender their bonds before the early tender expiration date.  In some cases, the $3 point early tender premium represents a majority of the spread premium, making a tender post early tender expiration much less attractive.  According to estimates, highlighted in Exhibit 1, the most attractive spread premiums seem to correspond with the highest coupons.

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