Warner Bros. Discovery credit rating downgraded due to weak metrics

Investing.com -- S&P Global Ratings has downgraded the issuer credit rating of Warner Bros. Discovery Inc. (NASDAQ:WBD) to ’BB+’ due to weakening credit metrics. The rating agency also lowered its short-term and debt ratings for the media company.

The downgrade followed a revised forecast for WBD for the years 2025 and 2026, mainly due to ongoing revenue and cash flow declines at the company’s linear TV operations. The S&P Global Ratings-adjusted EBITDA for WBD is now expected to remain around $9 billion for the next three years. Consequently, the leverage for the company is projected to be 4.3x by the end of 2025, significantly higher than the 3.5x leverage threshold for the rating. The leverage is not expected to fall below 3.5x until 2027.

The stable outlook is based on the expectation that the revenue and EBITDA declines in WBD’s linear networks will be offset by growth in its streaming and studio segments. This balance is expected to keep the EBITDA at roughly $9 billion, leading to a modest reduction in leverage to 4.3x by the end of 2025 and 3.9x in 2026, primarily through cash flow generation.

The downgrade also reflects challenges in WBD’s linear television networks segment, which is anticipated to offset growth in its studio and streaming segments. The EBITDA at global networks is forecasted to decline 20% to $6.5 billion due to increasing revenue declines and increased content costs from newly acquired sports rights content, coupled with its last year of NBA rights in 2025. Linear advertising is expected to decline 11% due to continued pressure on audience ratings and less sports than peers. Linear distribution is also expected to decrease 8% due to slower rates of price increases and a larger share of the subscription fees being allocated to streaming in its distribution deals that were renewed in 2024.

The rating agency does not anticipate WBD to significantly accelerate deleveraging through asset sales, but rather to prioritize investment in its growth businesses, which will extend the deleveraging path. Despite healthy EBITDA growth in its streaming segment, the company is expected to balance EBITDA growth with reinvestment in content, marketing, and international growth as it launches in key markets like the U.K.

The potential separation of WBD into a growth company (Streaming & Studios) and a Global Linear Networks company is not factored into the current rating. However, any separation of the company would be a credit negative as it would weaken the individual businesses, particularly the Global Linear Networks company, due to ongoing pressure in the linear television ecosystem.

The ratings could be lowered if the company faces sustained EBITDA declines that result in leverage remaining above 4.25x beyond 2026, or if FOCF weakens such that FOCF to debt declines below 5% on a sustained basis. Alternatively, the rating could be raised if WBD sustains growing revenue and EBITDA while reducing leverage to 3.5x and maintaining FOCF to debt above 10% on a sustained basis.

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