Fitch Rates Mattel's Proposed $600MM Note Issuance 'A-'

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to Mattel, Inc.'s (Mattel) proposed senior unsecured $300 million five-year notes and $300 million 30-year notes to be issued today. Management intends to use the proceeds for general corporate purposes and to fund a portion of the HIT Entertainment acquisition.

The notes will be issued under the existing indenture dated Sept. 23, 2010 and contain the standard protection for bondholders in the form of an offer to repurchase upon a change of control triggering event. The provision applies if there is a change of control at the 50% level and each of the three rating agencies downgrade Mattel below investment grade as a result.

The notes also can be redeemed in whole but not in part if the HIT acquisition is not consummated on or before May 1, 2012 or the stock purchase agreement to acquire HIT Entertainment for $680 million in cash is terminated at any time on or before that date. The redemption price would be equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the redemption date.

On Oct. 24, 2011 Mattel announced that it had agreed to purchase HIT Entertainment Ltd owner of Thomas the Tank Engine and other brands for $680 million in cash. The transaction is expected to be funded mostly with debt and should close in the first quarter of 2012. Fitch notes that the acquisition is not expected to have more than a modest impact to Mattel's more than $6 billion in revenues but should help the bottom line as HIT's licensing-based business would carry higher EBITDA margins than Mattel's average. Further, as the intellectual property owner, Mattel can provide the related toys for other expiring licenses. The transaction is subject to anti-trust clearance and other customary closing conditions.

Fitch had previously noted that there was room in Mattel's ratings to moderately increase leverage (debt/EBITDA) to near 1.4 times (x). Increases over this level would be temporary and revert back within 18 months. Mattel's leverage pro forma for the note issuance is 1.6x, nominally above Fitch's 1.4x expectations. However, this includes $237 million of peak seasonal short-term borrowings which are expected to be repaid by year end and a $10 million long term debt maturity that was paid on Oct. 6, 2011. Leverage excluding these obligations, but pro forma for the notes issuance is approximately 1.4x.

Mattel's low leverage and considerable liquidity support its strong credit profile. Equally important is Mattel's longstanding financially conservative policies designed to maintain a strong balance sheet and healthy cash flow. Mattel has demonstrated fairly steady performance over a long period of time. Except for 2008 when commodity prices spiked rapidly, its free cash flow has been positive in each of the past 10 years and averaged $364 million. Free cash flow is expected to remain robust in the $300 million range. Leverage has not exceeded 1.4x in 10 years. The stability shown by this track record mitigates the key industry risks of seasonality, retailer concentration and fashion risk that would normally be associated with smaller, more levered companies or those with a limited and less diversified product portfolio.

Mattel's 'A-' IDR and Stable Outlook are based on Fitch's expectation that the company will continue to demonstrate solid revenue and operating profit growth in a challenging cost environment. Additionally, Mattel is expected to maintain strong credit measures with leverage at or under 1.4x, its public financial targets, and double-digit interest coverage. Fitch expects that the company will remain prudent with regard to use of discretionary cash outflows related to future acquisitions and share repurchases. Fitch believes Mattel has strong financial flexibility to manage through potential adverse judgments related to the Carter Bryant/MGA litigation or other unplanned for events.

Revenues for the nine months ended Sept. 30, 2011 increased 10% to $4.1 billion paced by international market penetration, support from the theatrical release of Cars 2, and the recent high single-digit price increase on most of its portfolio. Sales leverage and cost control efforts, particularly on the SG&A front, yielded operating income growth of 15% to $544 million. As is typical at this seasonal peak, cash flow from operations was negative at $322 million, but far less so than the $428 million negative amount seen last year.

Mattel has considerable liquidity of almost $1.7 billion even at this seasonal low point comprised mainly of $1.4 billion in an undrawn revolver maturing in March 2015 and $300 million in cash. Debt maturities are modest with $50 million due in 2012 and $400 million in 2013. There are no further debt maturities until 2020.

Fitch currently rates Mattel as follows:

--Issuer Default Rating (IDR) 'A-';

--Unsecured bank facility 'A-';

--Senior unsecured notes 'A-'.

--Short-term IDR 'F2';

--Commercial Paper program 'F2'.

The company had approximately $950 million in total long-term debt which consists entirely of unsecured notes at Sept. 30, 2011.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2011);

--'Fitch Affirms Mattel's 'A-' IDR and Stable Outlook on Acquisition Announcement' (Oct. 24, 2011);

--'Mattel, Inc.' Credit Update (Sept. 21, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Mattel, Inc.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651800

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