Paramount’s $54 billion debt plays a starring role in Warner bid

Core Viewpoint - Paramount Skydance Corp. is attempting to acquire Warner Bros. Discovery Inc. but faces significant challenges due to a planned $54 billion debt load [1] Financing Structure - Paramount has a temporary financing package but lacks a maximum rate for permanent borrowings, risking spiraling expenses if debt markets worsen [2] - The financing is structured as a bridge loan with both investment-grade secured and non-investment-grade unsecured components, aiming to attract liquidity [6] - Long-term financing lacks interest rate caps, exposing Paramount to potential cost increases if market conditions deteriorate [7] Competitive Landscape - Paramount's hostile bid competes with a friendly offer from Netflix, which has already been approved by Warner's board, potentially driving up the acquisition cost and debt [4] - Paramount is positioned as an aspiring investment-grade borrower, needing to implement cost cuts and efficiency measures to achieve this status [3] Debt and Ratings - Paramount's debt leverage is projected to be around four times earnings at the acquisition's closing, with a target to reduce it to two times within two years [14] - Credit raters expect the leverage to be much higher, around seven times EBITDA, after the deal closes, indicating a potential downgrade to junk status [15][16] - Paramount's pro forma net leverage is estimated at 5.5 times, with analysts expressing skepticism about the realization of cost savings [16] Market Context - The current environment shows banks regaining risk appetite, with forecasts suggesting a record year for M&A activity in 2026 following a downturn in 2022 [9] - Paramount's financing will be equally split among three lenders, with Apollo acting as a traditional bank lender rather than through its private credit arm [10] Comparison with Netflix - Netflix's bid involves a bridge loan that will be replaced by bonds, with its loan being unsecured due to a stronger balance sheet and credit ratings [11][12] - Paramount is expected to pay more for its debt compared to Netflix, which is rated higher and has a $59 billion loan [10]