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Paramount Global’s Debt Rating Downgraded to Junk by S&P

Paramount Global’s debt rating was cut to junk status by credit-rating agency S&P Global, which cited the media conglomerate’s ongoing challenges with free cash flow generation relative to its debt.

S&P on Wednesday said it expects Paramount Global’s free operating cash flow-to-debt will remain “well below” 10% through 2025, and that adjusted leverage (debt-to-equity ratio) will stay above 3.5 times through then. The agency cited “the ongoing deterioration of the linear television ecosystem and the elevated investments for its direct-to-consumer (DTC) streaming model” for the downgrade.

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“Paramount will need to execute its plan to substantially improve streaming losses over the next two years to mitigate further downside ratings pressure,” S&P said in its ratings adjustment. Paramount Global’s long-term debt was $14.6 billion as of the end of 2023.

A rep for Paramount Global declined to comment.

The S&P downgrade comes a week after word emerged of an $11 billion bid by private-equity firm Apollo Global Management for Paramount Pictures — a price tag some $3 billion higher than the current total market cap of the parent company.

S&P’s credit-rating cut on Paramount Global increases the chance that more buyers for its assets will come forward, Wells Fargo analyst Steven Cahall wrote in a research note. That’s because S&P’s assignment of junk status to its debt “negates change-of-control provisions” and an acquiring party would not need to immediately repay or refinance the debt, he wrote. “We think any party interested in all or pieces of [Paramount Global], including studios, IP, CBS and real estate, are more likely to emerge now that the debt [change of control provision] is void,” according to Cahall.

Sources familiar with the thinking of Shari Redstone — non-executive chair of Paramount Global and its controlling shareholder — say her preference is to not sell the company off in pieces. rather, Redstone is understood to favor a deal with David Ellison’s Skydance Media, under which Skydance would acquire Redstone’s National Amusements Inc. holding company to pave the way for Skydance and Paramount Global to merge.

As part of its ratings update, S&P issued a “stable outlook” for Paramount Global, which “reflects our expectation that leverage will decline to around 4.0X in 2024 with FOCF/debt improving to about 5% as losses in the streaming segment materially decline.” That is “largely based on our assumption that streaming losses will improve by more than $700 million due to strong average revenue per user (ARPU) growth from price increases enacted in mid-2023 and ongoing, albeit more modest, subscriber growth.”

S&P Global on Feb. 23 placed Paramount Global on “credit watch negative.” The firm explained that it took the action after it introduced cash-flow metrics (along with existing leverage metrics) into its ratings methodology.

Previously, the firm had a “BBB-” rating on the company, its lowest investment-grade rating. With the change Wednesday, S&P now has a issuer credit rating on Paramount Global and its senior unsecured debt of of “BB+,” which is the “highest speculative-grade by market participants.” At the same time, S&P lowered its issue-level rating on Paramount Global’s junior subordinated debt to “BB-” from “BB” and its short-term rating to “B” from “A-3.”

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