Paramount Skydance faces high borrowing costs in Warner Bros Discovery buyout financing

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Paramount Skydance buyout financing

Highlights

Skydance's Paramount-Warner Bros Discovery merger sold $52bn in debt at yields above comparable investment-grade bonds, with the junk tranche yielding 9 percent.
The merged entity faces $80bn net debt versus $12bn annual ebitda pre-synergies, relying on a declining traditional TV business for cash generation.
Major holders Apollo, Pimco, and Man Group hold much of the debt, while investment-grade rating fragility and competitive content expenditure heighten financial risk.

Debt sale tests demand for media buyout financing

As reported by Financial Times, David Ellison’s media company sold $52bn in debt on Wednesday and secured an investment-grade credit rating, although it is the lowest rung of that category. Investors nevertheless demanded yields above comparable investment-grade bonds, while the junk-rated portion of the offering came with a 9 percent yield.

Bond buyers are being asked to back a combined media group whose cash generation still depends heavily on a traditional TV business that remains in long-term decline. The merged company has roughly $12bn in annual ebitda before expected cost savings from the transaction, against net debt of about $80bn.

Competitive pressure adds to balance sheet risk

Projected cost savings of $6bn a year are significant, but retaining all of those benefits may prove difficult in a highly competitive industry. Netflix co-chief executive Ted Sarandos said on Wednesday he wants the streaming group to grow faster, pointing to the risk of another costly round of competition for content and subscribers.

A deterioration in Paramount’s outlook could create further pressure because investment-grade funds may be forced to sell if the company loses that rating. According to a person familiar with the situation cited in the text, a large share of the new debt is held by major firms including Apollo, Pimco and Man Group, leaving the company exposed to well-resourced creditors if conditions worsen.

Ellison may draw some comfort from the fact that lenders did not extract especially tight covenants, possibly in exchange for the relatively generous yields on offer. Even so, after disputes with Warner Bros Discovery’s board and legal challenges from U.S. states, the new Paramount begins this phase with a costly and heavily indebted balance sheet that leaves little room for error.

In our earlier article on Brightline’s Florida rail business restructuring, we covered how mounting balance-sheet pressure led to further rating downgrades across its operating and parent-level debt. We noted that the company pursued a restructuring support agreement and Chapter 11 filings for certain non-operating entities, alongside steps such as interest deferrals and new secured notes issuance, as liquidity tightened despite rising ridership.

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