Warner Bros. cut to junk by Moody’s after split plan

Warner Bros. Discovery Inc. was downgraded to junk by Moody’s Ratings, cementing the media giant as a fallen angel just years after it sold one of the biggest high-grade bond deals on record.

Moody’s downgraded the company’s senior unsecured debt to Ba1, the highest junk tier, from Baa3, the lowest in investment grade, according to a statement Tuesday evening. The ratings firm also assigned Warner Bros. a corporate family rating of Ba1 and placed the grades on review for further cuts.

The downgrade comes after Warner Bros. Discovery said it would split into two independent companies, unshackling its fast-growing streaming business from the struggling legacy media channels. It adds another complication to the entertainment giant’s discussions with bondholders, who must decide whether to sell back their securities to the company and give up key safeguards on the rest of their Warner Bros. notes in the process.

With the cut, some $31 billion of the entertainment giant’s debt will no longer be eligible for Bloomberg’s high-grade index. The company is likely to become one of the largest issuers of junk bonds, according to Bloomberg Intelligence, but exactly how big it’ll be – and how much debt will migrate to the high-yield index – is not clear because the company is buying back bonds.

Moody’s rating action follows a similar downgrade from S&P Global Ratings in May, and a further cut from that ratings firm earlier this week.

The downgrade reflects Warner Bros. Discovery’s continued operating challenges along with a change in its debt structure to include secured debt, according to Moody’s.

Warner Bros. plans to refinance more than $14 billion of unsecured notes as part of the breakup, using $17.5 billion of secured bridge financing. That effectively puts new creditors ahead of unsecured noteholders.

“Governance and in particular a change in the company’s financial policies were key drivers of the rating action,” Moody’s said in the statement.

The buyback plan has forced investors to make some difficult choices, since investors who sell back their notes must agree to give up some safeguards on other bonds they hold.

The company’s formation in 2022 resulted in a $30 billion debt sale, one of the largest to date.