WBD Bonds Sell Off On Reports Of Split; Debt Expected To Remain With TV Segment

Baa3/BBB-/BBB- EUR 27s/30s/33s +5bp/+15bp/+20bp

• FY23 EBITDA of ~USD 10bn would fall to USD ~8bn were the Studios and DTC (i.e. streaming) verticals to be split from the group, leaving Networks (i.e. TV) behind.
• Were the USD ~40bn in net debt to remain with the TV entity, this would result in an increase in leverage from ~4x to ~5x.
• S&P affirmed WBD in March at which point they saw leverage at 4.3x in 2024 and dropping to 3.5x by end-2025 against a downside threshold of remaining above 3.5x on an inability to return to EBITDA growth.
• Though WBD is already significantly above the downside threshold, any deal would be unlikely to close until closer to the end of the deleveraging pathway laid out by S&P though WBD would still likely end up with leverage above current levels.
• Combined with the loss of their significant growth drivers, we don’t think a two-notch downgrade would be out of the question, placing the remaining entity firmly into HY territory.
• Looking at the docs we don’t see language that would prevent this move; there is reference to the issuer not being able to sell/transfer assets “substantially as an entirety” but the fact that the activities under consideration for disposal are relatively small compared to the TV business doesn’t likely meet the threshold even if they are future growth drivers.