mixmotive/iStock Editorial via Getty Images
Paramount Global (NASDAQ: PAR) (NASDAQ: PARAA) long-term debt rating was downgraded to junk status at S&P — a move that Wells Fargo said could actually make it easier to acquire the company by freeing up obligations to repay debt.
S&P cut Paramount to BB+ from BBB- due to worsening credit metrics due to the accelerating decline of linear media and the continued shift to a less certain (and fiercely competitive) streaming model. The company expects operating free cash flow to debt to remain below 10% and adjusted leverage to remain above 3.5x beyond 2025.
“We are not debt experts,” writes Steven Cahall of Wells Fargo, “but we believe that most PARA debt instruments have language that means that if a rating agency moves to [high-yield]which we think S&P just did, then they will rescind the change of control provisions.”
“This means that if someone bids for PARA they will not need to repay and reissue the debt,” substantially reducing the risk, he continues.
Paramount (PARA) (PARAA) has a market capitalization just under $8 billion, but with net debt of about $11.4 billion. Apollo (NYSE:APO) has an offer for Paramount studios at $11 billion, which would be an easy premium for market cap, but for debt.
If Paramount accepted Apollo’s offer, a RemainCo of linear assets and Paramount+ would get less than 2x leverage with nearly $2 billion in EBITDA, Cahall said — and a studio sale could still attract higher bids, with BET and Nickelodeon which serve as other unlockable assets.
“We believe that any interested parties in all or part of PARA, including movie studios, intellectual property, CBS and real estate, are more likely to emerge now that the debt CoC is nil,” Cahall said, noting that this creates more sum of the debt. upside potential of the shares.
S&P moved Paramount from negative control to stable. Moody’s has a long-term rating of Baa3 with a negative watch, while Fitch has a BBB- rating with a negative watch.
After the news, PARA was +1.9% your $11.58; PARA +1.6% at $21.66.