Warner Bros. Discovery's Debt Restructuring: Navigating the Prisoners' Dilemma in Bond Tender Offers

Warner Bros. Discovery (WBD) is navigating a high-stakes debt restructuring through its June 2025 tender offers, creating a "Prisoners' Dilemma" for bondholders. Participants face a critical choice: prioritize early tender participation to secure liquidity and premiums or risk proration and subordination exposure in lower-priority pools. This analysis dissects Pools 1 and 5—the strategic linchpins of WBD's plan—to identify optimal plays while cautioning against overexposure to subordinated risks.

The Game Theory of Bond Tender Offers

The "Prisoners' Dilemma" framework applies here: individual bondholders may hesitate to tender early, fearing others will crowd out their participation (proration), while the collective outcome hinges on widespread early participation to secure the highest returns. WBD's structure exacerbates this tension through acceptance priority levels, proration caps, and covenant changes that could redefine risk and reward.

Pool 1: The High-Stakes Arena

Pool 1 targets $3.75 billion in senior notes across three issuers (DCL and WMH). Key terms include:
- Early Tender Deadline: June 23, 2025 (to claim a $50/€50 premium).
- Acceptance Priority:
- Level 1: DCL's 4.90% 2026 notes ($650M).
- Level 2: DCL's 1.90% 2027 Euro notes (€600M).
- Level 3: WMH's 3.755% 2027 notes ($4B).
- Consent Payments: Variable caps (e.g., up to $20/$1,000 for WMH's 2027 notes).

Strategic Insight:
- Act Early: High demand for Level 1 notes risks proration. Investors holding these should tender by June 23 to avoid being diluted.
- Covenant Risks: Amendments here may reduce covenants on WBD's remaining debt, but subordination hierarchies could leave lower-priority notes vulnerable to credit downgrades.

Pool 5: The Fixed-Priced Opportunity

Pool 5 offers a simpler path:
- Total Consideration: $1,000 per $1,000 principal plus a $50 Early Tender Premium.
- Notes Included: TWI's high-coupon debentures (e.g., 8.30% 2036 notes) and WML's assorted paper.
- No Proration: Acceptance priority isn't specified; tenders are accepted in full (subject to the $14.6B total cap).

Strategic Insight:
- Low Risk, High Certainty: Pool 5's fixed-price structure and lack of proration make it a safer bet for liquidity seekers.
- Consent Payments: TWI's 2036 notes offer a $20/Consent Payment, but only to those submitting Consent Only instructions—a rare feature in modern tenders.

Key Risks and Caution Flags

1. Proration in Pool 1:

2. If demand exceeds the $3.75B cap, Level 3 notes (WMH's 2027 series) face the highest dilution risk. Holders here should prioritize early tenders.

3. Subordination Exposure:

4. Covenant changes may shift repayment hierarchies. Post-restructuring, junior liens or amended terms could leave lower-priority pools (e.g., Pool 4's 2062 notes) exposed to credit downgrades.

5. Corporate Split Uncertainty:

6. WBD's planned corporate split (announced in late 2024) may reallocate debt to subsidiaries. Bondholders should monitor which entity assumes responsibility for tendered notes.

Investment Strategy: Prioritize Pools 1 and 5, Avoid Lower Priority Pools

• Optimal Play:
• Pool 1: Target Level 1 and 2 notes. Tender early to secure the premium and avoid proration.

• Pool 5: Lock in fixed returns; use the $50 premium as a liquidity hedge against market volatility.

• Avoid:

• Lower-priority pools (e.g., Pool 3's 2043 notes with no consent payments) and any series with subordinated liens.

• Monitor Covenants:

• Track amendments to indentures post-tender. A loosening of covenants could signal financial strain, while stricter terms might indicate WBD's confidence.

• Credit Watch:

• Agencies like S&P may downgrade WBD's credit if debt levels remain elevated post-restructuring. Holders of un-tendered notes should brace for widening spreads.

Conclusion: Time is of the Essence

The June 23 deadline is non-negotiable for securing the Early Tender Premium. Bondholders in Pools 1 and 5 face a clear path to liquidity gains, but proration risks in Pool 1 demand urgency. Meanwhile, lower-priority pools offer little upside and significant subordination exposure.

For investors, the optimal strategy is to act decisively by June 23, prioritize high-priority notes, and avoid overexposure to pools with uncertain covenant outcomes. WBD's restructuring is a zero-sum game—those who navigate the "Prisoners' Dilemma" wisely will emerge with the sharpest gains.

Final Note: This analysis assumes WBD's bridge loan ($17.5B) will fund the tender. Monitor funding updates closely; delays or defaults could unravel the entire plan.