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Investing.com -- Fitch Ratings has downgraded Warner Bros. Discovery (NASDAQ:WBD) and its subsidiaries to ’BB+’ from ’BBB-’ and placed the ratings on Watch Negative following the company’s announcement to separate into two entities.
The downgrade reflects Fitch’s expectation that post-separation, WBD will be smaller and less diversified while operating in a declining industry with elevated leverage. Fitch warned that a multi-notch downgrade is possible depending on the final capital structure.
The ratings agency expects to resolve the Watch Negative status once more separation details become available, with the transaction completion anticipated by mid-2026.
The separation will split WBD into WBD Global Networks (RemainCo) and WBD Streaming & Studios (SpinCo), creating uncertainty about the company’s future credit profile. The lack of pro forma financials and a clear target capital structure has hindered Fitch’s assessment of the post-transaction credit standing.
WBD also announced a complex tender and consent process with extensive covenant stripping, which Fitch described as "somewhat aggressive" and likely to exert "considerable downward pressure" on the company’s credit profile.
RemainCo is expected to absorb approximately half of the refinanced bridge facility, implying roughly $8.75 billion of new secured debt. Based on this, Fitch estimates RemainCo’s gross leverage will be in the mid-4x range, similar to the current leverage of the combined company.
Fitch views this estimated leverage level as aggressive for a business segment facing declining revenues and margin compression. The separation will leave RemainCo as a significantly smaller and less-diversified company within a secularly declining industry.
Despite these challenges, Fitch expects RemainCo to generate robust free cash flow due to its modest capital intensity. RemainCo will retain a 20% equity stake in SpinCo post-transaction, which management plans to monetize to reduce debt.
In its peer analysis, Fitch noted that RemainCo will lack the size and diversification of The Walt Disney Company (NYSE:DIS), NBC Universal Media LLC, and Paramount Global (NASDAQ:PARA). Fitch also expects RemainCo to have higher leverage than all of these competitors.
On a pre-separation basis, Fitch assumes WBD’s total revenue will decline in the low single-digits as linear network declines continue, partially offset by increases in direct-to-consumer revenue. Studio revenue is expected to vary annually, with the company focused on reinvigorating the DC Comics franchise with the 2026 reboot of ’Superman’.
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