Warner Bros. Discovery's Debt Rating Downgraded by Moody's Amid Spin-Off Plan

International rating agency Moody's recently downgraded the debt rating of Warner Bros. Discovery's subsidiary, adding complexity to the media giant's negotiations with bondholders following its announced spin-off plan. The downgrade comes after a similar move by S&P Global Ratings earlier this week, which further lowered Warner Bros. Discovery's bonds into a deeper junk category.

Moody's lowered the rating of Discovery Communications and WarnerMedia Holdings' senior unsecured notes from Baa3 to Ba1, stripping them of their investment-grade status. Additionally, Moody's placed these ratings on review for further potential downgrades. The downgrade was driven by Warner Bros. Discovery's plan to split into two separate entities, separating its rapidly growing streaming business from its struggling traditional media operations.

In a statement on June 10, Moody's cited "the ongoing operational challenges faced by Warner Bros. Discovery, as well as changes in its financial policies—including the introduction of secured debt into its capital structure before and after the spin-off." As part of the spin-off plan, the company intends to refinance over $140 billion in unsecured notes through $175 billion in secured transitional financing. This arrangement effectively prioritizes new creditors over existing unsecured noteholders.

This repurchase plan presents investors with a difficult choice, as those who agree to tender their notes must forfeit certain protective covenants on their remaining bonds. The downgrade by Moody's reflects the company's continued navigation through a challenging business environment, characterized by shifting consumer preferences and intense competition in the media and entertainment industry. The introduction of secured debt into its capital structure is seen as a strategic move to bolster its financial position, but it has also raised concerns among investors about the company's ability to manage its debt obligations.

The downgrade by Moody's is likely to increase Warner Bros. Discovery's borrowing costs and may limit its access to capital markets. To regain the confidence of investors and rating agencies, the company will need to address these challenges and demonstrate its ability to generate sustainable cash flows. The ongoing negotiations with bondholders and the execution of the spin-off plan will be critical in determining the company's future financial health and market position.