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Fitch affirms Mattel's long-term rating, retains negative outlook

Fitch Ratings on May 23 affirmed Mattel Inc.'s long-term issuer default rating at B- and upgraded the U.S. toymaker's senior unsecured nonguaranteed notes to B/RR3 from CCC+/RR5, while retaining its negative outlook.

The rating agency said the B- rating and the negative outlook reflect Mattel's execution risk in stabilizing revenue and growing EBITDA from depressed levels as the company continues to face revenue pressures at Fisher-Price, Thomas and Friends and American Girl. The brands had a combined revenue of approximately $1.5 billion, or 30% of the group's total gross revenue, in 2018.

Mattel's EBITDA in 2018 was $267 million — excluding $182 million of charges related to restructuring, integration, asset impairment and the Toys R Us Inc. bankruptcy — down from $278 million in 2017 and from the $900 million levels in 2015/2016.

Fitch said EBITDA would need to grow to $450 million for Mattel to become free-cash-flow breakeven as free cash flow remains materially negative.

The rating agency said it withdrew Mattel's short-term issuer default rating and commercial paper rating of B since the company terminated its commercial paper program.

The agency also noted that the ongoing trade war between the U.S. and China would have a material adverse impact on the toy industry, given the significant volume of toy products manufactured in China. If the U.S. proceeds with an additional 25% tariff on $300 billion worth of Chinese products sold in the U.S., including toys, it could have an impact on Mattel toy lines.

However, Fitch noted that Mattel's tariff risk is mitigated by the fact that the majority of its Hot Wheels and Barbie products, which are the company's fastest-growing brands, as well as many Fisher-Price products are manufactured outside China.