Paramount Skydance Debt Downgraded to Junk Following WBD Deal

With its mammoth deal for Warner Bros. Discovery, Paramount Skydance is about to amass a ton of new debt and it faces quite a lot of other monetary dangers. Now certainly one of Wall Street’s big credit-rating businesses has downgraded Paramount’s debt to junk standing and reduce its issuer default rankings.

Fitch Ratings downgraded Paramount Skydance’s long-term issuer default rating to from “BBB-” to “BB+,” placing it into speculative-grade funding territory (aka “junk”). In addition, Fitch downgraded Paramount Skydance’s senior unsecured debt from “BBB-” to “BB+” — and positioned all the rankings on “Rating Watch Negative,” indicating that additional downgrades could also be in the offing.

The downgrade on Paramount Skydance “reflects competitive pressures across the media sector and continued [free cash flow] headwinds from significant transformation costs,” Fitch Ratings said in an announcement Monday. “Fitch believes PSKY’s leverage and FCF may remain outside negative rating sensitivities longer than we anticipated.”

The adverse rating watch “reflects uncertainty related to the proposed acquisition of Warner Bros. Discovery,” Fitch added. Potential credit score dangers embrace the potential debt-funded construction; Fitch’s expectation of “materially elevated leverage”; and “limited visibility on post-transaction financial policy and capital structure,” the company said.

Fitch’s announcement comes after the two other big credit score rankings businesses, Moody’s and S&P Global, each announced on Feb. 27 that they have been placing Paramount Skydance on review for potential downgrades. On Feb. 26, Netflix deserted its deal to purchase Warner Bros.’s studios and streaming enterprise after David Ellison’s Paramount upped its WBD bid to $31/share — leaving Paramount the winner in the M&A battle with a deal carrying a $111 billion enterprise worth.

Paramount will assume roughly $33 billion in debt that Warner Bros. Discovery has on its books. All told, the new company may have roughly $79 billion in long-term debt.

In its downgrade notice, Fitch Ratings said it has “limited visibility” into Paramount Skydance’s post-transaction capital construction, including the ranking and safety package deal of any new debt, the anticipated break up between secured and unsecured tranches, and the place debt can be issued within the group. “This uncertainty increases the risk of structural subordination and potential priming of existing unsecured creditors, particularly if the combined group adopts a more bifurcated secured/unsecured capital structure,” Fitch said.

Paramount’s proposed acquisition of WBD is “highly complex, reflecting the scale of required financing and limited transparency on the pro forma capital structure, as well as the operational challenge of integrating two large media groups,” Fitch continued. “We expect heightened regulatory scrutiny in key jurisdictions, which could increase execution risk and extend the timeline to close. Fitch believes key areas of focus could include market concentration and potential impacts on competition, distribution practices and consumer outcomes.”

That said, the acquisition of WBD would improve Paramount’s scale across filmed leisure by possession of another major studio with a deep catalog of flicks and TV reveals. That guarantees to “strengthen PSKY’s competitive position including greater pricing power, control over content licensing, and prioritization of premium content for its own platforms,” Fitch said.

S&P Global, for its half, already had a “BB+” (junk) credit score rating on Paramount. Its transfer to put Paramount Skydance on review “with negative implications” displays “our view that the potential merger with WBD will increase PSKY’s leverage well above our 4.25x downgrade threshold for the current rating,” S&P Global said.