The coronavirus pandemic is wreaking havoc around the world, causing economic activity to contract substantially. Walt Disney (DIS -1.33%) is keeping its parks, among other businesses, closed to limit the spread of the virus.
The company will lose a significant amount of revenue because of the closures, while expenses remain high because Disney is choosing to continue paying cast members until at least April 18. To help reduce the chances of a cash crunch, Disney raised more than $6 billion by issuing debt securities.
The first set of bonds
The borrowings are spread into five different tranches, which Disney can use for general corporate purposes and to pay back other debt. Let's look at each one in a little more detail:
- $1.75 billion due five years from now, in 2025, carrying an interest rate of 3.35%.
- $500 million due in seven years (2027), with an interest rate of 3.7%.
- $1.25 billion due in 10 years (2030), with an interest rate of 3.8%.
- $750 million due in 20 years (2040), with an interest rate of 4.625%.
- $1.75 billion due in 30 years (2050), with an interest rate of 4.7%.
The weighted average cost of the debt is 3.715% before tax. After accounting for the tax savings, the after-tax interest expense comes in at 2.9%. Undoubtedly, it's a reasonable price to pay for $6 billion in liquidity during one of the most severe economic crises in a century.
What's more, Disney included the callability feature in the issuance. So if the company should wish to pay off the bonds earlier than their due dates, it can do so by paying a small premium. The feature gives it additional flexibility in managing the balance sheet.
Reinforcing the balance sheet with these additional funds gives Disney more flexibility. Before the move, Disney had $6.8 billion in cash and $54 billion in debt. By raising the money, the company can move forward with its plans on expanding Disney+ internationally, continue paying staff members despite closing parks, and reduce the chances of having to sell assets if the pandemic is much worse than anticipated.
Tapping the Canadian bond market
In addition to the bonds issued in U.S. dollars, Disney also tapped the Canadian market by issuing up to 1.3 billion Canadian dollars ($923.5 million) at 3.057%, due in 2027. The credit-rating agency Fitch said it "views the issuance positively as the company bolsters its liquidity position, reduces reliance on commercial paper markets, and addresses current maturities." It added that "Disney has the financial flexibility and capacity to withstand the impact of the coronavirus pandemic."
Furthermore, the bond also includes the option for the company to retire the issue by paying a small premium.
What this means for investors
In its most recent quarterly statement, Disney said it would lose $175 million in operating income from its two park closures in Asia, should they remained closed for two months. Now, the company is facing the possibility of all its parks, hotels, and cruises being shut down for longer. The uncertainty surrounding the costs and the duration of the losses had many stakeholders worrying about whether the company had enough liquidity to survive the pandemic without selling assets.
With the money raised, Disney can now survive an extended period of slashed revenue. Before raising the money, the company had a little under $7 billion in cash on its balance sheet. Now, adding the money it was able to raise brings the total to over $12 billion. Importantly, investors can feel more secure that the company won't face liquidity problems in the near term.
The company's products and services will almost certainly return to previous levels over time as bans on large gatherings are lifted and it becomes safe to travel again. Therefore, enduring short-term closures is vital for this blue-chip stock.