Fitch Ratings has affirmed the 'BBB-' Long-Term Issuer Default Ratings (LT IDRs) of
Fitch has also affirmed the 'BBB-' LT IDR of
Fitch has also affirmed the 'BBB-' senior unsecured ratings for instruments at Discovery and WMH, the 'BB+' senior unsecured ratings for instruments at
Fitch has also assigned a LT IDR of 'BBB-', ST IDR of 'F3' and a commerical paper rating of 'F3' to
The ST IDR and CP ratings of
Key Rating Drivers
Merger Synergy Benefits: WBD increased its expected merger-related expense synergies to
Strong Brands: WBD offers a wide array of brands across multiple distribution platforms including Discovery, Food Channel,
Market Position: WBD is the world's largest pay-TV company, second largest global media company, and second largest
DTC Offerings: DTC offerings will be critical components of content creators' and aggregators' long-term viability as MVPDs continue shedding subscribers. Areas of focus for DTC providers include growing subscribers fast enough to offset near-term costs content increases, elevated competitive threats, and ongoing linear subscriber declines. While most industry participants are expecting DTC-related losses to peak in 2023, they are experiencing increased pressure to accelerate towards profitability as a faster pace.
WBD has shown an ability to drive its DTC offering toward profitability faster than the industry due to its focus on maximizing revenue and not just subscriber growth while simultaneously managing content costs. For 4Q 2022, yoy DTC losses declined more than
Advertising Market: Fitch expects the current
FCF Generation: Fitch anticipates FCF will improve over the rating horizon as significant near-term content spend growth should be offset by WBD's global linear and digital distribution platforms, increased scale and resultant expense synergies, and relatively low capital intensity. WBD's lower cost non-scripted content provides an offset to higher cost scripted content. Declining near-term DTC losses will also improve FCF generation.
Capital Allocation: WBD's internal investments will continue to focus on the production and acquisition of content for distribution over multiple platforms. Although near-term DTC internal investments will continue to be heightened by infrastructure costs and content buildout requirements, the company has made significant progress toward profitability.
Management restated their commitment to maintaining their investment-grade rating and Fitch expects the company to use FCF to prepay debt until the company reaches its 2.5x to 3x target leverage range. Fitch expects WBD's Fitch-calculated pro forma leverage will decline below its 4.0x negative rating trigger during 2024 due to debt repayment and EBITDA improvement. Fitch-calculated pro forma leverage declined to 4.5x at
Parent-Subsidiary Relationship: Fitch links and equalizes the IDRs of WBD, Discovery and WMH based on a strong subsidiary/weak parent approach and the IDRs of WMH and WM based on a strong parent/weak subsidiary approach.
Derivation Summary
WBD is well-positioned within its rating category with leading positions in scripted, reality-based, news, sports and documentary programming. Its content distribution is diversified across multiple linear and digital platforms and geographically. Despite being the second largest global media company, WBD still lacks the size and diversification of
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
For FY2023, Fitch expects low single digit aggregate revenue growth. The studios segment is expected to grow mid-single digits due to theatrical release schedule at the studios. The network's decline of low single digits is due primarily to the advertising recession, as the expected improvement in 2H 2023 is unable to offset the high single digit declines in 1H 2023. DTC sees mid-single digit growth due to continued subscriber and advertising growth;
Thereafter, aggregate revenues grow in the mid-single digits annually driven primarily by overall advertising improvement and continued steady DTC subscriber growth as the company expands into new international markets;
Margins benefit from WBD's increased scale, top line improvement, Fitch's expectations of
Capex remains flat in 2023 as the company finishes its global digital platform buildout and the capex intensity declines to the low 2% thereafter;
Fitch-calculated annual FCF increases to approximately
No M&A or share buybacks over the near term, in line with Discovery's behavior after the
Cash balances and near-term FCF geared toward debt repayment, driving leverage below Fitch's negative sensitivities of 4.0x in 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch-calculated EBITDA Leverage sustained below 3.0x;
A Fitch-calculated cash flow ratio (cash from operations minus capex/total debt with equity credit) sustained above 20%;
Material viewership on platforms that will drive increased advertising and affiliate/subscription fees and enhance revenue diversity.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weaker operating performance or discretionary management actions causing Fitch-calculated EBITDA Leverage to exceed 4.0x in the absence of a strong commitment to reduce leverage;
A Fitch-calculated cash flow ratio sustained below 12.5%;
Meaningful customer defections to alternative viewing platforms;
FCF pressure from higher programming costs.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: As of
WBD has redeemable equity balances with put rights of
Fitch estimates WBD's pro forma closing total debt with equity credit to operating EBITDA was around 4.9x. However, WBD reiterated its desire to remain investment-grade after the merger and announced it was tightening its leverage target to 2.5x to 3.0x from its prior 3.0x to 3.5x. To insure adequate liquidity to fund near-term debt repayments, WBD temporarily paused share buybacks in line with its efforts to quickly delever after acquiring
Issuer Profile
WBD, formed with the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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