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View Full Version : Oh oh. Another bond rating downgrade...


Bstanley
10-04-2002, 11:38 AM
Well Standard and Poor's has done it again.

Disney's long term Bonds are now a BBB+, down from an A-. The stock has dropped about 5% as a result.

ilvsocr00
10-04-2002, 12:17 PM
I'm sorry - what dos a bond rating downgrade mean to a company?

Another Voice
10-04-2002, 12:19 PM
An interesting rumor: the general opinion of "the financial types" is that Vivendi already has it's restructuring plans worked out, AOLTimeWarner is going through the process of squashing AOL and will emerge a much stronger company, and Viacom is doing really well.

That leaves Disney as the only struggling media giant without a way out of its mess. And it's very soon to be nothing but junk status.

Bstanley
10-04-2002, 12:30 PM
A Bond Rating Downgrade means it will cost Disney more money to borrow money.

The downgrade shows that S&P believes there is more risk of a Disney default on their corporate Bonds than there is for Bonds issued by a company with a higher (A, AA, AAA) Bond Rating.

Investors who are interested in buying Bonds will look at Disney Bonds and other company's Bonds and will decide to buy a higher rated company's Bonds because there is less risk, unless...

In order to make their Bonds more 'interesting' to buyers Disney will have to offer higher interest rates, and will end up spending more to borrow the same amount.

ilvsocr00
10-04-2002, 12:35 PM
Thank you for responding to my question - your explanation makes perfect sense. That could explain the stock falling steadily today. With any luck Disney can get back on track soon!

DVCDAVE
10-04-2002, 01:16 PM
It is now 1 notch above junk status.

I believe this is the 4th downgrade in 14 months, and the 2nd in 3 months.

Is there anyone still left that thinks Ei$ner is doing a fine job?

DVCDAVE
10-04-2002, 01:57 PM
Oh !! one other thing.....I don't think this is a biggy though....forget about the December dividend, with a BBB rating you can kiss it goodbye. That's not official, but look for that announcement soon.

sgtdisney
10-04-2002, 05:49 PM
When are they going to replace Eisner with someone who knows how to run the company?

Luv2Roam
10-04-2002, 06:53 PM
When are they going to replace Eisner with someone who knows how to run the company?
Evidentently when it reaches junk status (which may not take long as this fast pace) and when the entire company goes on the chopping block.:p

manning
10-04-2002, 09:20 PM
The thinking out there is about 7 months.

Bob O
10-04-2002, 10:38 PM
Dont worry, there are still apologists on this site who think all is well!!!

DVCDAVE
10-05-2002, 04:14 PM
The trouble with apologists is they view things as they want them to be, when the rest of us view things as they really are.

sgtdisney
10-06-2002, 11:39 AM
Originally posted by DVCDAVE
The trouble with apologists is they view things as they want them to be, when the rest of us view things as they really are.

Isn't that the truth? As a stockholder, I have been viewing things as they are for a while.. It is sad to see what has happened with Disney over the last few years. I realize that some of the recent problems have had to do with the economy in the last year. But before Eisner went on his spending spree in the last couple years, Disney was in an excellent position to weather this kind of downturn. Now, well. Eisner served his purpose in the mid 80s and 90s when Wells was there to temper his management style. Disney needs to do something soon, before there is no Disney left to save.

MHopkins2
10-06-2002, 12:06 PM
Can someone help me out with this, because I must be stupid. (Admittedly, my Finance classes were my least favorite.) Why would Disney bonds be so close to "junk" status??? Do the financial folks actually think Disney is in such sad shape they would default on their bonds? Or declare bankruptcy? Do you all think that? Am I the only one who thinks the financiers are totally overreacting?

I'm FAR from a Car 1 apologist - I think current management has their heads so far up their ... it's a wonder they haven't died from oxygen deprivation. But I don't think that translates into impending total financial ruin!

Luv2Roam
10-06-2002, 12:58 PM
Is there anyone still left that thinks Ei$ner is doing a fine job?
I don't even think ME is at this point. ;)

Bstanley
10-07-2002, 10:24 AM
I think current management has their heads so far up their ...

The phrase should be completed - "their second point of contact." - find yourself a former paratrooper to explain. :-)


The people who rate bonds probably don't imagine that Disney Corp is going to go belly-up ala' Worldcom. They are just trying to assign a level of risk to what is basically an I.O.U. between Disney and a bond buyer.

Keep in mind - there are significant numbers of 'Junk Bonds' that get payed off (even burdened with their high interest rates and all) every year. However there are a significant number that don't get payed off. Some are defaulted on entirely, some don't pay the interest that they were supposed to, etc. (in other words - all shades of gray in between you lose your money and you get everything you were promised). And also keep in mind - there are some AAA Bonds that don't get paid either.

When S&P says that Disney Bonds are BBB they mean that there is some additional risk (compared to a AAA bond) that Disney may 'change the rules' on paying them, either in duration or interest, etc. With $13B in debt, a weak tourism marketplace, a 4th place network, and generally poor performance from all parts of the company - coupled with several very interesting lawsuits hanging over them - well, let's just say - S&P is being prudent to point out that there is risk.

DVCDAVE
10-07-2002, 10:56 AM
And also keep in mind - there are some AAA Bonds that don't get paid either.


B.S.! Name ONE AAA company that didn't pay off their debt ! I've been a stockbroker for 24 years, and have never even heard of a company with a AAA bond rating NOT pay off their debt, let alone seen one happen. If they didn't pay, it wouldn't be AAA, and the entire credit rating system would be regarded as meaningless. To their credit, S&P, Fitch, and Moody's are highly regarded services that measure a company's ability to repay their debt. Courts have even upheld lawsuits involving a breach of Fudiciary responsibility if the fudiciary invested in bonds of less than investment grade by these services. Therefore; the above mentioned quote has no basis in FACT.

Yes there are companies that HAD a AAA rating get downgraded, THEN default, but there hasn't been a AAA company default during my career.

Bstanley
10-07-2002, 02:02 PM
B.S.! Name ONE AAA company that didn't pay off their debt !

Ouch, ouch, ya got me... ;-) I don't know any names.

Actually the fact that I don't know the name of a company that hasn't fulfilled a AAA rated Bond as written doesn't change the fact that the rating agencies show that there is a probablility that such a company exists.

The probability of a AAA rated Bond defaulting within 10 years is listed at 0.01%

The probability of a BBB rated Bond defaulting within 10 years is 2.30%

(From "Applied Corporate Finance", Wiley & Sons - I knew those old books would come in handy :-)

DVCDAVE
10-07-2002, 03:00 PM
You said;

And also keep in mind - there are some AAA Bonds that don't get paid either.

We aren't talking theory here. I concur on the theory, and it supports my arguement that the ratios that the services use are time tested to show the risk of default is extremely low for any AAA company (it would almost have to be fraud, or some manner of disaster). But your textbook citation doesn't give me the answer to your prior statement.

Bstanley
10-07-2002, 03:37 PM
OK fine... thank goodness for the web (and Google).

Between 1970 and 1994 there were 3 defaults of AAA rated Corporate Bonds. The first two were Texaco and Getty Oil (which was also a victim of the Pennzoil lawsuit that forced Texaco into bankruptcy) and the third was Federated Department Stores.

I would call 0.01% an extremely low risk...

MHopkins2
10-07-2002, 03:40 PM
Hang on. A "junk" bond (which due to its nature pays far higher interest than a "good" one, correct?) still only has a 2.3% probability of default? H*ll, where's my checkbook? Sign me up!

Bstanley
10-07-2002, 04:09 PM
A Fitch/S&P BBB rating is still considered 'Investment grade', Lower Investment grade, but still an "investment", rather than a "bet"... for your additional exposure to risk you might get a 1.5% higher return.

A BB is "speculative", the definition of "Junk" starts somewhere below that...