Paramount Skydance's outstanding bonds are now yielding over 9% as the media company moves to sell about $52 billion of new debt to finance its $81 billion cash purchase of Warner Bros. Discovery.
The debt sales include $44.4 billion of U.S. dollar senior secured first-lien notes and euro-denominated second-lien notes. There is also $7.5 billion of senior secured bank loans. The notes are expected to be priced late Wednesday.
Paramount's existing public senior debt will be subordinate to all the new debt, and as a result carries junk-grade ratings of single-B2 from Moody's and single-B-plus from Standard & Poor's. In bond-speak, the existing debt is getting "primed," meaning that new debt is being issued that is senior to it. This is the bane of public bondholders.
Among the bonds being primed are Paramount's 6.875% bonds due 2036. They were trading Wednesday afternoon at around 84, yielding 9.25%, Bloomberg data show.
The cusip or identifier on the debt is 925524AX8 and investors can track the price on TRACE, a service of Finra, which is a self-regulatory organization for member broker-dealers and responsible under federal law for supervising its members. The current yield on the Paramount debt is about a percentage point higher than the average in the junk-bond market.
The new bonds will be issued to institutional investors under Rule 144A.
Paramount's stock gained 3.4% to $10.33 Wednesday and continues to trade in a tight range between $10 and $11 as investors take a wait-and-see approach to Paramount's purchase of the larger Warner Bros. and whether it will pay off. The stock traded as high as $20 a share a year ago.
The existing Paramount bonds carry considerable risk since they are junior to all the new debt, but senior to Paramount equity and the Ellison family's big equity stake in the company.
The debt offers an intriguing opportunity for those willing to bet that the Ellisons, led by CEO David Ellison, and his father and financial backer, Larry Ellison, can make the deal work and keep the company solvent.
Following the Warner deal, which is set to close next week, Paramount is expected to carry about $80 billion of net debt, a stiff seven times projected 2026 earnings before interest, taxes, depreciation and amortization (Ebitda).
The company has aggressive targets for boosting Ebitda by $6 billion annually and cutting debt to under four times Ebitda by 2028-a more manageable level.
One negative is that intermediate-term Treasury rates-against which Paramount will price its new debt-have moved up a percentage point since the Warner deal was announced, and a half percentage point in the past month. That could raise interest costs by $500 million annually on the new debt relative to early-year levels and make it tougher for Paramount to hit its financial targets.
"The company continues to face significant strategic and execution risks. The secular decline of linear television will remain a meaningful headwind to revenue, earnings and free cash flow growth, while rising sports rights costs, streaming integration and subscriber churn, and execution of a multi-year restructuring program create additional challenges," wrote analyst at Moody's.
"Free cash flow will remain constrained by elevated interest expense, restructuring costs and integration spending, making successful delivery of targeted synergies and deleveraging objectives important to the company's future credit trajectory," the rating agency added.