Fitch has downgraded Paramount’s debt to junk status and put the media giant on a negative credit watch over uncertainty related to its $110 billion merger with Warner Bros. Discovery, warning that its leverage and free cash flow “may remain outside negative rating sensitivities” for longer than anticipated.
The firm said the downgrade reflects “competitive pressures across the media sector and continued [free cash flow] headwinds from significant transformation costs.” Fitch added that the negative credit watch is based on its expectation that the combined company will have”materially elevated leverage” due to $54 billion in debt financing commitments, as well as the firm’s “limited visibility on post-transaction financial policy and capital structure.”
“Fitch views PSKY’s proposed acquisition of WBD as highly complex, reflecting the scale of required financing and limited transparency on the pro forma capital structure, as well as the operational challenge of integrating two large media groups,” the firm said in a statement. “We expect heightened regulatory scrutiny in key jurisdictions, which could increase execution risk and extend the timeline to close.”
It expects that the combined entity would generate minimal or negative free cash flow initially, and that “restructuring and integration needs could be significant,” which would “increase sensitivity to operating volatility and refinancing conditions.” However, it believes the WBD deal will ultimately strengthen Paramount’s competitive position, including “greater pricing power, control over content licensing, and prioritization of premium content for its own platforms.”
Fitch said it would remove the negative credit watch if the Paramount-WBD deal is terminated or when details about its post-transaction capital structure and pro-forma financial profile become more clear.
Factors that could lead to an upgrade in its credit rating include steady EBITDA margin improvement and leverage sustained below 3 times, as well as free cash flow margin sustained above 2.5%. Factors that could lead to a downgrade include sustained operating underperformance amid ongoing competitive pressures, EBITDA leverage above 4 times and free cash flow margin below 1%.
The firm expects Paramount’s fiscal 2026 revenue to increase by the low single digits, with TV/media declines in the high-single digits due to erosion in linear distribution and advertising pressure. It also expects streaming growth in the low-teens, but noted margins would improve as profitability increases from subscriber growth, pricing and cost management initiatives.
S&P Global is also maintaining its negative credit watch on Paramount due to “significantly higher leverage” and warned it could lower its rating on the combined entity by at least one notch from Paramount’s current BB+ rating depending on the final capital structure and management’s deleveraging plans.
S&P expects the combined company’s leverage to be well above downgrade threshold of 4.25 times, warning that it could increase to about 8 times at close and improve to around 4 times three years after closing driven by $6 billion in cost savings.
“While the improved strength of the combined business is a credit positive development, the acquisition presents significant integration risks,” the firm said. “We expect to equalize our ratings on WBD with those on PSKY after the transaction closes, assuming no significant changes to our assumptions.”
As of Dec. 31, Paramount had $3.3 billion in cash and $14 billion in outstanding debt. The company also had full availability under its $3.5 billion revolving credit facility and $50 million Miramax credit facility, which mature in January 2028 and November 2027, respectively.
Paramount has said it would carry $79 billion in net debt following the deal’s closing, which is expected by Sept. 30 pending shareholder and regulatory approval. Executives told analysts on Monday that the combined entity would return to investment grade credit metrics within three years after closing.
Shares of Paramount Skydance fell over 7% on Tuesday, while WBD shares were down 0.65%.
