Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of
Fitch has also affirmed Discovery's and WMH's 'BBB-' senior unsecured instrument ratings and WM's 'BB+' senior unsecured instrument ratings.
Fitch has also affirmed the Short-Term IDRs and commercial paper ratings of Discovery and DCB at 'F3'.
The IDRs are driven by WBD's elevated leverage, which offsets its position as the world's second largest media company. Although leverage remains outside Fitch's negative rating sensitivities it was only 0.5x outside Fitch's prior total leverage expectations for
Key Rating Drivers
Operational Headwinds: The diversified media industry has faced significant macroeconomic and operating headwinds over the past four years culminating in a linear advertising recession from 2H22 into 4Q23 and the writer's and actor's strikes in 2023 which impacted content creation. The introduction of multiple competing digital content distribution platforms accelerated viewership fragmentation and provided a further drag on linear advertising. In addition, Discovery's debt-funded merger with
Merger Synergy Benefits: WBD has fully realized its adjusted merger-related expense synergies of
Debt Reduction: Fitch takes considerable comfort from WBD's significant debt reduction efforts following the merger's completion. Fitch-calculated debt, which includes the revolving receivables facility, has been reduced by
Heightened Leverage: Despite the company's debt reduction efforts, Fitch-calculated leverage (5.0x at
Advertising Recession: Although digital advertising has recovered, linear weakness continued into 4Q23 as Fitch expected. Fitch expects linear media, including cable networks, to recover slowly, although they will become increasingly hyper-cyclical and continue losing share to digital. The next 18 months will be critical to determine if WBD's operating models have been overly compromised by this shift, as Fitch expects only a portion of digital growth will be captured by WBD's DTC offerings.
Linear Network Secular Threats: Fitch's ratings recognize the threats to WBD's linear cable networks as multichannel video programming distributors (MVPD) subscribers are expected to continue their long-term secular decline. While acknowledging the relative strength of WBD's networks, Fitch expects cash flow generation and margins will remain under long-term pressure. However, over at least the near term these networks are expected to continue to benefit from their dual-stream revenue profile and FCF generation characteristics.
DTC Offerings: DTC is a critical components of content aggregators' long-term viability as MVPDs continue shedding subscribers. Fitch views scale and content investment as prerequisites for DTC success in general and several competitors are part of larger, better capitalized diversified conglomerates. With that said, the growth prospects of DTC services could be hindered by viewers' willingness and ability to subscribe to multiple services especially given the expected continuation of rate increases.
In FY23, WBD became the second DTC provider to reach profitability after
Strong Asset Portfolio: WBD's brands include Discovery, Food Channel,
Strong Market Position: WBD is the world's largest pay-TV company, second-largest global media company, and second-largest
Parent-Subsidiary Relationship: Fitch links and equalizes the IDRs of WBD, Discovery and WMH under the strong subsidiary/weak parent approach and the IDRs of WMH and WM under the strong parent/weak subsidiary approach.
Derivation Summary
WBD's rating and outlook reflects its leading positions in scripted, reality-based, news, sports and documentary programming, positive EBITDA from its DTC segment, and significant debt repayment following Discovery's debt-funded merger with WarnerMedia in
WBD is larger than
Key Assumptions
FY24 total revenues increase low single digits. Studios expected to grow by low single digits due to the overhang of the strike effects. Network's decline low single digits as slow linear advertising recovery is more than offset by continued MVPD subscriber declines. DTC has mid-single-digit growth as growth in ad-supported subscription tier drives digital advertising growth and improvement in average revenue per subscriber;
Thereafter, total revenues grow in the low single digits. Studios benefit from increased content production and distribution following delays in 2024 from the strikes. Networks see continued low single digit annual revenue declines due primarily to continued MVPD subscriber losses and linear advertising softness. DTC continues to grow driven by advertising and ARPU growth and new international market rollouts;
Margins remain roughly flat as ongoing DTC growth is offset by continued margin compression at the Networks and slight improvement in Studio margins;
Capex intensity declines to 2.5% as the company finishes its global digital platform buildout;
Fitch-calculated annual FCF remains approximately
No M&A or share buybacks over the near term, in line with Discovery's behavior after the
Near-term FCF geared toward debt repayment, driving leverage below Fitch's negative sensitivity of 3.5x in 2026.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch-calculated EBITDA leverage sustained below 3.0x;
--(CFO-Capex/debt) sustained above 20%.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Sustained operating underperformance amid ongoing competitive pressures;
Fitch-calculated EBITDA leverage not approaching 3.5x over the next 12 months-18 months;
--(CFO-Capex/debt) sustained below 12.5%.
Liquidity and Debt Structure
Adequate Liquidity: As of
WBD has redeemable equity balances with put/call rights of
Despite leverage being outside sensitivities at the merger's closing, WBD reiterated its desire to remain investment grade after the merger and tightened its leverage target to 2.5x-3.0x from the prior 3.0x-3.5x. To insure adequate liquidity to allow WBD to reach that, it temporarily paused share buybacks and continue to redirect FCF to debt repayment, which is in line with the company's efforts to quickly delever after acquiring SNI in 2018.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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