Standard and Poor's issued a report this week noting the risks faced by Mattel and Hasbro, the two largest toy companies.  Both companies carry a debt rating of BBB minus, one step above 'junk' status. 

The ratings agency noted the sales declines experienced by the traditional toy industry each year since 2002, and the trend toward children abandoning toys at earlier ages for videogames, DVDs, iPods, Web surfing, IM-ing, and other non-toy forms of entertainment. 

Both Hasbro and Mattel have significant concentration of their sales that also poses risks.  Barbie sales have been declining recently at Mattel, and the brand at its current size is critical to the company's success.  And Hasbro's reliance on licensed properties, most recently Star Wars, also exposes it to the risk of sales volatility.  At the other end of the supply chain, the concentration of sales at Wal-Mart, especially if Toys R Us continues to decline in share, limits the companies' ability to control pricing.

The ratings agency indicated that a rating change is not expected within the next two years, but the companies will have to keep their debt relatively low and act to control their risks if they want to keep investment grade debt ratings in the future.