Fitch Downgrades Paramount, Warner Bros. Discovery Credit Ratings as Merger Closes

Fitch has reduced the credit ratings of both Paramount and Warner Bros. Discovery, as the media conglomerates have finalized their $110 billion merger. The downgrade comes after the firm identified "materially higher leverage" following the acquisition, as well as "significant execution and integration risks." Fitch explained that combining operations, realizing synergies, and managing a higher debt burden pose execution risks for the companies.

The firm also highlighted the uncertainty surrounding the achievement of the $6 billion in synergies expected within the first three years of the deal, which is critical to the companies' goals of reducing net leverage to 3 times by the end of 2029.

Additionally, Fitch pointed out structural challenges facing the combined company, including declining linear revenues, intense competition in the streaming market, and risks associated with content-driven growth. The linear operations of the newly merged entity generated approximately 52% of pro forma revenue and 86% of EBITDA in fiscal 2025.

Fitch warns that a sharper-than-expected decline in linear revenues could reduce the benefits of scale, cross-platform advertising sales, and constrain the company's ability to offset weaknesses through direct-to-consumer ventures and studio growth.

The rating agency has lowered Paramount and WBD's long-term issuer default ratings from BB+ to BB, indicating heightened vulnerability to default risk. However, they also affirmed Paramount's short-term issuer default rating at B, suggesting that while default is possible, the risk remains limited. Paramount's first-lien secured debt received a BBB-/RR1 rating, and its second-lien secured debt got a BB/RR4 rating.

The company's senior unsecured debt and junior subordinated notes were downgraded to BB-/RR5 and BB/RR5, respectively. WBD's senior unsecured notes were lowered to B+/RR6.

With the acquisition, the combined entity's leverage is estimated at 7.8 times for fiscal 2026, which is projected to decrease to 6.2 times in fiscal 2027 and 4.5 times in fiscal 2028 as the companies capitalize on merger-related cost savings. Fitch's projections rely on Skydance achieving 85% of the more than $6 billion in identified merger-related cost synergies and $4 billion in other cost reductions.

However, if synergies are lower or costs are higher, the firm warned that it could negatively impact free cash flow, slow debt reduction, and pressure the credit ratings.

The firm also noted that the legal settlement reached with 12 state attorneys general could provide a means to reach the target of a net leverage level below 3.75 times in fiscal 2028 and 3 times in fiscal 2029 more quickly. However, Fitch cautioned that compliance measures could potentially constrain cost actions and operating flexibility.

Furthermore, political, regulatory, and scrutiny from the creative sector could pose integration delays, necessitate changes to content production or distribution, reduce anticipated savings, and hinder deleveraging efforts.