Hollywood film giant Warner Bros. Exploration (WBD.US) was downgraded again and downgraded by S&P to “BB junk”

The Zhitong Finance App learned that S&P Global Ratings (S&P Global Ratings), one of the top three international credit ratings, further downgraded the unsecured bonds issued by the company to a deeper “junk” rating after Hollywood film and television giant Warner Bros. Exploration (WBD.US) announced the spin-off plan, and indicated that it is evaluating downgrading the company's other credit ratings.

The rating agency said in a statement on Monday that it has downgraded Warner Bros. Discovery's unsecured bond rating from “BB+” to “BB,” which is the second highest grade in the junk rating, lower than the highest “BB+” rating previously given by the agency, which means that in the junk rated bond category, the credit ratings of the bonds issued by Warner Bros. Exploration are not even as good as most junk bonds.

Warner Bros. Exploration said it will use $17.5 billion of secured bridge financing to refinance more than $14 billion of unsecured bonds during the business division spin-off. This move actually gave priority to new creditors in the payment order over unsecured bondholders. As a result, S&P Ratings downgraded the credit rating of these bonds.

“The additional secured debt will significantly weaken the recovery prospects for the company's unsecured debt,” S&P analysts wrote in a statement.

Warner Bros. Explore said in a presentation on Monday that in addition to the debt due this year, the company still has about $35.5 billion in outstanding bonds.

The company announced on the same day that it will split its business divisions, officially lift the continuous bundling of the rapidly growing streaming media business with the troubled traditional TV media business channels, and establish two new companies that can independently carry out transactions and business revenue.

The “junk” credit rating given by S&P means that the bonds issued by the company are sensitive to changes in economic or financial conditions, may increase the risk of default, and have significant speculative characteristics.

Generally speaking, junk grade bonds (i.e. junk bonds), also known as high-yield bonds, refer to high-yield bonds that have a credit rating far below the “investment grade.” According to the S&P and Fitch rating systems, bonds with a credit rating below BBB- are considered junk grade bonds; according to Moody's rating system, bonds below Baa3 are considered junk bonds. These high-yield bonds are usually issued by companies with poor financial conditions or emerging types of unprofitable companies. The risk of default is high, so higher bond yields need to be provided to attract investors and compensate investors for the additional high risks they bear.

Warner Bros. Discovery (“Warner Bros. Discovery”), formed by merging AT&T's WarnerMedia with Discovery, Inc., in April 2022, was burdened with high debt and transformation pressure since its inception. However, Warner Bros. Exploration, which has mastered the century-old film and television brand Warner Bros. Pictures, still ranks among the “Big Five” Hollywood film and television giants, along with Disney, Universal, Paramount, and Sony.

Over the past two years, Warner Bros. Exploration's overall performance has declined or fluctuated greatly. In particular, revenue and cash flow have continued to weaken. The core reasons include multiple factors such as loss of traditional linear TV advertising users and subscribers, huge merger and acquisition liabilities, content impairment, continued growth in streaming media transformation costs, and sports copyright pressure.