Warner Bros. Discovery's Debt Split: Navigating Credit Risks and Streaming Upside

Warner Bros. Discovery's (WBD) upcoming split into two publicly traded entities—Global Networks and Streaming & Studios—has set the stage for a high-stakes reorganization of its $38 billion debt burden. This strategic move, finalized by mid-2026, aims to address legacy liabilities while unlocking the growth potential of its streaming division. However, the uneven debt allocation between the two companies creates stark divergences in credit risk and valuation opportunities. For investors, understanding these dynamics is critical to positioning portfolios for asymmetric returns.

The Debt Divide: Global Networks' Liquidity Strains vs. Streaming's Scalability
Global Networks, the division retaining $30 billion of WBD's $38 billion debt, faces immediate challenges. Its core business—linear TV networks like CNN, TNT, and Discovery+—is in structural decline, with ad revenue dropping 11% year-over-year in Q1 2025. While free cash flow remains robust ($1.79 billion EBITDA in Q1), its debt-to-EBITDA ratio exceeds 6x, a red flag for bondholders. To deleverage, management has announced layoffs, asset sales (e.g., non-core lifestyle channels), and renegotiation of costly sports rights. A lifeline comes in the form of a 20% retained equity stake in Streaming & Studios, which could be monetized tax-efficiently to reduce debt.
In contrast, Streaming & Studios carries a smaller debt load but shoulders growth ambitions. With 122.3 million subscribers (up 23% YoY) and a target of $1.3 billion in 2025 EBITDA, the division aims to fuel HBO Max's expansion into 100+ markets and leverage hit content (e.g., The White Lotus, Stranger Things). However, rising subscriber acquisition costs and a 9% drop in average revenue per user (ARPU) due to ad-supported tiers threaten profitability.
Bondholder Dynamics: Short-Term Stability vs. Long-Term Volatility
The June–July 2025 tender offers for WBD's legacy bonds are a pivotal moment. Investors holding debt tied to Global Networks should prioritize short-dated bonds (e.g., Pool 1 in the tender) to lock in premiums before the spinoff. While Global's stable cash flows provide a floor, its reliance on declining linear TV ad revenue and high leverage make its Baa3/BBB- credit ratings vulnerable.
Streaming & Studios' debt, however, offers a growth bet. Long-dated bonds (e.g., Pool 4) could outperform if HBO Max's subscriber growth stabilizes and content margins improve. Yet, execution risks are high: missing EBITDA targets or subscriber additions could trigger credit downgrades.
Actionable Insight: Aggressive bondholders should overweight Streaming & Studios-linked debt for upside in streaming scalability, while conservative investors should hold Global Networks' short-term bonds for cash flow visibility but hedge against ad revenue erosion.
Cash Flow Sustainability: A Tug of War
Global Networks must balance deleveraging with cash flow preservation. Asset sales—such as Discovery's lifestyle channels or non-core regional sports rights—could generate $5–10 billion in liquidity. However, delays in these sales or weaker-than-expected bids could strain its ability to service debt.
Streaming & Studios, meanwhile, faces a subscriber growth vs. profitability dilemma. While expanding to 150 million subscribers by 2026 is feasible, the cost of acquiring users in emerging markets (e.g., India, Southeast Asia) may offset margin gains. Management's focus on premium content (e.g., DC Studios) and ad revenue from HBO Max's global footprint will be critical to hitting EBITDA targets.
Strategic M&A Opportunities: A Double-Edged Sword
Global Networks may explore non-core asset sales (e.g., regional sports rights or underperforming international channels) to reduce debt, creating opportunities for private equity firms or niche buyers. For Streaming & Studios, strategic acquisitions—such as indie film studios or gaming IP—could bolster its content library and reduce reliance on traditional TV revenue.
However, both divisions risk overextending themselves. Global's debt burden limits its flexibility, while S&S's growth capex could strain its balance sheet if subscriber growth falters.
Key Risks and Catalysts to Watch
- Q2 2025 Earnings: A miss on Streaming & Studios' $1.3 billion annual EBITDA target or further declines in Global's ad revenue could spook investors.
- Debt Refinancing: The $17.5 billion bridge facility must be replaced with permanent financing at favorable rates. Delays or punitive terms could pressure both entities' credit profiles.
- IRS Approval: The spinoff's tax-free status hinges on compliance with post-2025 IRS rules, including a 30-day holding period for refinanced debt.
Historically, a strategy of buying WBD five days before earnings and holding for five days resulted in a total return of -50.7% from 2020 to 2025, with a maximum drawdown of -66.41%, underscoring the volatility tied to these events.
Investment Recommendations
- Bondholders:
- Global Networks: Hold short-term debt for yield but avoid long-dated bonds.
- Streaming & Studios: Target long-dated bonds if confident in HBO Max's subscriber retention and margin expansion.
- Equity Investors:
- Global Networks: Consider undervalued equity if asset sales proceed smoothly.
- Streaming & Studios: Buy on dips if Q2 EBITDA hits targets, but note that historically, such strategies around earnings announcements have underperformed, yielding a -50.7% return since 2020. Avoid overpaying for streaming hype.
Conclusion
Warner Bros. Discovery's split is a high-wire act balancing debt reduction with growth. Global Networks' liquidity struggles and Streaming & Studios' valuation upside create a mosaic of risks and opportunities. Bondholders must navigate this divide carefully, while equity investors should prioritize execution over speculation. The coming quarters will test whether WBD's strategic reorganization can turn its $38 billion debt burden into a catalyst for shareholder value—or a liability that drags both entities down.
Comments
No comments yet