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Fitch downgrades Mattel's long-term issuer default rating to BB from BBB-

Fitch Ratings has downgraded several of Mattel Inc.'s ratings, including the toymaker's long-term issuer default rating to BB from BBB-, according to a note circulated to clients Dec. 11.

Fitch also downgraded the short-term issuer default rating and commercial paper program rating to B from F3 and Mattel's senior unsecured non-guaranteed notes to BB-/RR5 from BBB-. The rating agency assigned a BBB-/RR1 rating to Mattel's proposed $1.6 billion asset-based lending revolving credit facility and a BB/RR4 rating to the company's proposed issuance of $1 billion in senior guaranteed notes. The ratings outlook is negative.

The downgrades reflect a weak operating performance and the company's proposed issuance of $1 billion in unsecured guaranteed notes, the analysts said. The company's revenue has "steadily declined" in the past few years, falling from a peak of $6.5 billion to an expected $5 billion in 2017. Fitch expects that EBITDA will decline about 50% to a range of $400 million to $450 million, compared to $880 million in 2016, according to the note.

"Execution missteps, including the inability of the company to effectively respond to evolving play patterns, and retail challenges, most recently the September 2017 bankruptcy of Toys 'R' Us, have pressured operating results and cash flow," the analysts said.

Competition with rival toymaker Hasbro Inc., as both companies adjust to changing consumer tastes, has also put pressure on Mattel's results, the analysts said. Reuters reported Nov. 15 that Mattel recently rejected an acquisition bid by Hasbro, saying the offer undervalued the company.

"Children are increasingly digitally oriented and marginally less interested in traditional toys," the analysts said. "Relative to Mattel, Hasbro has more successfully responded to these changes through brand storytelling, creating digital experiences and revenue streams to support its portfolio's customer relevance and create additional sales opportunities."

The analysts said children, particularly girls, are outgrowing traditional toys earlier as they focus more on social media, sports and beauty products. Mattel's Barbie brand revenue, for example, declined to about $900 million in 2015, down from $1.3 billion in 2012, according to the note.

"Mattel's traditional toy portfolio, including Barbie, has had difficulty effectively retaining mindshare as this phenomenon progresses," the analysts said.

Mattel's revenue base is also tied to licensed property, meaning that the loss of such licenses, such as Walt Disney Co.'s Disney Princess line to Hasbro in 2016, and the risk of underperforming licenses such as "Cars 3 in 2017," puts the company's operating performance at risk.

"All of these challenges have been exacerbated by the recently strengthening U.S. dollar, given that around 40% of Mattel's revenue is generated internationally," the analysts said. "Mattel's struggle to respond to these challenges has resulted in core brand declines in recent years."