OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Mattel, Inc.'s (Mattel) new $350 million of five-year notes. The proceeds from the issue will be used to pay down the company's $300 million of 2.5% senior unsecured notes maturing Nov. 1, 2016 as well as for general corporate purposes. A full list of ratings follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Revenue Volatility/EBITDA Declines

Top line volatility in recent years is likely to persist due to a difficult traditional toy market and the strong U. S. dollar, exacerbated by the loss of the Disney Princess line in 2016 (approximately 7% of gross sales). EBITDA, which declined from the 2012 - 2013 peak of $1.4 billion to around $900 million in 2015, could be in the mid-$800 million range in 2016.

Mattel's EBITDA declined to $891 million at year end 2015 from $997 million in 2014 primarily due to the negative impact of foreign exchange, and lower entertainment related revenues as well as Monster High sales. Leverage, which was in the 1.0x range in 2012-2013, was 2.4x in 2015 and is likely to remain in the mid-2.0x range in 2016.

Strong Studio Release Schedule Starting 2017

Mattel's licensing deals with Disney for Cars and Warner Brothers monetization of its DC Comic intellectual property via theatrical releases through 2020 should bolster Mattel's revenues. Cars is a proven property and Fitch expects revenues from this property to add at least 3% to 2017's revenues.

Scale and Leading Market Position

Mattel is one of the largest manufacturers and marketers in the traditional toy industry globally with more than $5.7 billion in net revenues in 2015 and approximately 41% of revenues generated outside the U. S. It has leading brands with proven longevity, including Barbie, American Girl and Hot Wheels.

Highly Seasonal and Uneven Cash Flows

Virtually all of Mattel's free cash flow after dividends (FCF) is generated in the fourth quarter coinciding with the holiday period as is typical for most toy manufacturers. Mattel's FCF has been modestly negative in two of the past three years. Fitch again expects modestly negative FCF near the $50 million range in 2016 but could improve to an inflow of around $100 million in 2017.

KEY ASSUMPTIONS

Fitch's key assumptions within the agency's rating case for the issuer include:

--Revenue declining approximately 3% in 2016 from $5.7 billion to $5.5 billion due to the loss of the Disney Princess license as well as negative impact from foreign exchange, with revenues growing to $6 billion in 2017 as the company's entertainment license schedule improves.

--Leverage remaining elevated at 2.4x in 2016, and improving to around 2.0x in 2017.

--Negative FCF negative of around $50 million in 2016 before turning positive at around $100 million in 2017.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to an upgrade include:

Operating with leverage sustained below 1.5x while maintaining or growing shares in most of its larger core brands such as Barbie, Hot Wheels and Fisher-Price.

Future developments that may potentially lead to a negative rating action include:

Developments that could potentially lead to a negative rating action include a material and consistent loss of market share or a secular decline in the traditional toy industry and any debt financed share buybacks such that leverage is sustained over 2.25x.

LIQUIDITY

At the end of the 4th quarter and through the 2nd, much of the industry has considerable liquidity. The toy industry has highly seasonal revenues, profits and cash flows. Mattel's financing requirements are primarily driven by working capital requirements in the second half of the year. The company's key sources of liquidity are commercial paper, which is supported by a $1.6 billion unused revolving credit facility maturing in 2020 and cash on hand.

The company's financial flexibility is strong given cash balances of more than $800 million at the end of each year in 13 of the past 14 years and a well laddered debt maturity schedule. Mattel's goal is to have at least $800 million of cash at year end to self-fund seasonal working capital peaks in the third and fourth quarter. Mattel has pulled back on discretionary activities to meet some of the more controllable aspects of its financial framework such as the $800 to

$1 billion cash balance at year end. Mattel ended 2015 with $893 million of cash, meeting its public cash goals. As of the end of 2Q 2016, Mattel had $318 million of cash on hand in addition to $1.53 billion of availability on its revolver.

FULL LIST OF RATING ACTIONS

Fitch currently rates Mattel as follows:

--Long-Term Issuer Default Rating (IDR) 'BBB+';

--Short-Term IDR 'F2';

--Commercial Paper 'F2';

--Unsecured bank facility 'BBB+';

--Senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.