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Paramount’s Rating Could Sink To Junk Again As Skydance Merger Talks End

As Paramount Global quite suddenly ended ongoing talks about a merger with Skydance Media, the move could result in Paramount’s rating getting cut to junk for the second time.

Paramount Global’s rating could get cut by Moody’s Ratings to junk by the end of the year, research firm CreditSights said in a note.

Moody’s last offered an update on its thoughts about Paramount’s rating on Tuesday, when it identified risks around the company’s relatively high debt levels, as well as potential difficulty in pivoting from conventional television distribution to direct-to-consumer.

The bond grader has Paramount at Baa3, the lowest high-grade rating, and the outlook is negative, meaning cuts are possible in the medium term.

Moody’s would be the second bond grader to cut Paramount to junk, after an S&P Global Ratings downgrade in March.

A second downgrade could hit Paramount’s bond prices further. Companies with a single junk rating can still qualify for inclusion in investment-grade indexes, but two high-yield ratings usually knock them out and force high-grade investors to sell their bonds.

Skydance had planned to pay down some of Paramount’s debt, making a potential deal a positive for bondholders.

At least some of the remaining potential buyers for the company could instead boost debt levels, said CreditSights, which downgraded its ratings on the company’s bonds to “underperform” from “market perform”, reported Bloomberg.

 

Adding to Paramount’s troubles is the fact that it generates most of its earnings from television and its bonds don’t have too many legal safeguards for investors.

CreditSights analysts led by Hunter Martin and Davis Hebert viewed the tone of Tuesday’s statement from Moody’s as “incrementally cautious” and believe the grader will likely tighten Paramount’s leverage requirement, effectively raising the likelihood of a ratings downgrade.

The last time the company tapped the high-grade bond market was in 2022, when it sold A$1.5 billion in 40-year notes.

CreditSights analysts seemed to pin a fair amount of responsibility for the current crisis on media heiress Shari Redstone – Paramount’s largest shareholder who controls 77% of Paramount’s class A voting stock. Earlier this month, Sydance’s owner David Ellison reduced his initial A$3.76 billion offer for National Amusements to provide additional cash for the company’s nonvoting shareholders.

In a later subsequently submitted, Ellison created more cash for shareholders by reducing Skydance’s valuation of the merger to $7.14 billion from A$7.5 billion, a move that wasn’t likely to be welcomed by Redstone.

“While we understand her reported aversion to a sale that would result in the break up of Paramount, we think Ms. Redstone may no longer have the ability to remain so selective. This is particularly concerning for Paramount’s bondholders given prior interest from private equity groups and the aforementioned lack of any meaningful covenant protection,” the CreditSights analysts wrote.
Redstone was expected to sell her family’s stake to Skydance as part of a A$3.38 billion deal for the family’s holding company, National Amusements.

Paramount are the owners of Hollywood studio Paramount Pictures, CBS, MTV and Comedy Central and also of Australia’s Network 10 and Paramount+.

Paramount had approximately A$23.71 billion of long-term obligations — including bonds and leases — as of the end of the first quarter.



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