S&P downgraded Warner Bros. Discovery to BB+ amid continued income and money move declines at its linear TV operations. Something BB+ and under is junk bond standing for the large rankings company.
It reaffirmed its “unfavorable” outlook. It additionally mentioned that from a credit score perspective it’s not a fan of a attainable WBD cut up, teased after an inner reorganization into two divisions (Streaming & Studios and World Linear Networks). That would put extra stress on rankings.
Linear woes noticed S&P decrease its forecast for EBITDA (earnings earlier than curiosity, taxes, depreciation and amortization) for 2025 and 2026 to about $9 billion for the following three years. That interprets into anticipated leverage ( ) of 4.3x on the finish of 2025 and three.9x in 2026, on course however nonetheless considerably above the company’s 3.5x leverage threshold for the score. S&P sees leverage remaining above 3.5x till 2027.
Debt has been the corporate’s bugaboo since Discovery acquired Warner Media three years in the past. Regardless of paying down billions, it’s nonetheless a heavy raise.
Particularly, S&P forecasts that EBITDA at international networks will drop 20% to $6.5 billion on account of accelerating income declines and elevated content material prices from newly acquired sports activities rights content material coupled with its final 12 months of NBA rights in 2025. It sees linear promoting down 11% on account of continued stress on viewers rankings and fewer sports activities than friends. It additionally anticipates linear distribution will decline 8% on account of slower charges of worth will increase and extra of the subscription charges being allotted to streaming in its distribution offers that had been renewed in 2024.
“WBD’s whole promoting and distribution efficiency has lagged friends on account of its increased publicity to common leisure content material, weaker portfolio of home sports activities rights, which is additional exacerbated by the lack of the NBA broadcast rights after the 2024/2025 season, and a smaller base of ad-supported streaming subscribers,” wrote S&P analysts.
The agency mentioned it does “not count on WBD to materially speed up deleveraging by way of asset gross sales, however to as an alternative prioritize funding in its development companies, which can lengthen the deleveraging path.” That’s streaming particularly, with its flagship service simply renamed HBO Max.
S&P modified its outlook on WBD to “unfavorable” in August of 2024, and it hasn’t offered belongings and gained’t be capable of on enough scale wanted this 12 months to influence the leverage ratio.
S&P famous wholesome streaming development at WBD but it surely expects the tempo to reasonable in 2026 as the corporate seeks to reinvestment in content material, advertising and worldwide growth because it launches in key markets just like the U.Ok.
Whereas this technique might maximize its long-term development potential, it alerts a tolerance to take care of leverage above the three.5x threshold for the score past 2026.
A possible separation of WBD will not be factored into our present score, however any separation of the corporate right into a development firm, Streaming & Studios, and a World Linear Networks firm could be a “credit score unfavorable”.
WBD has simply accomplished an inner reorganization into the 2 distinct working divisions to reinforce strategic flexibility and create potential alternatives to unlock further shareholder worth. That just about means a merger or sale of one of many items.
CEO David Zaslav and CFO Gunnar Wiedenfels mentioned final week that there no particular plans however repeated that the division provides it choices. Comcast is within the technique of splitting of its cable networks.
“Whereas we’re not conscious that WBD has decided on a possible cut up of the corporate, a separation would probably stress rankings as a result of it could weaken our view on the person companies, notably the World Linear Networks firm, on account of ongoing secular stress within the linear tv ecosystem,” S&P mentioned.
