Warner Bros' Debt Downgrade Is An 'Ironically Positive' Event: Analyst

Bank of America Securities analyst Jessica Reif Ehrlich maintained a Buy rating on Warner Bros. Discovery WBD with a price forecast of $14 on Monday.

Ehrlich argued, in an analyst report, that recent developments, notably an internal reorganization and an S&P debt downgrade (viewed as an “ironically positive” event), have increased WBD’s strategic flexibility.

While acknowledging challenges, the analyst expressed continued belief in WBD’s compelling collection of assets and upcoming catalysts.

Also Read: Warner Bros’ Streaming Growth, Cost Cuts Highlighted, Analysts Stay Cautious

The analyst said upcoming catalysts included easing Studio comparisons, potential recovery in advertising, further growth in direct-to-consumer (DTC), and exploring strategic options to drive shareholder value.

Following the merger of Discovery and WarnerMedia in early 2022 that created Warner Bros. Discovery (WBD), its shares have significantly underperformed the broader market and the analyst’s expectations.

Although several financial assumptions from the original merger have not materialized, the analyst reaffirmed her belief in the company’s unique and valuable underlying assets.

Ehrlich previously wrote that exploring strategic alternatives, such as a potential spin-off of the Studios and Streaming businesses, could be the most effective way to unlock the company’s significant unrecognized value.

The analyst noted that several developments in recent months have brought WBD closer to realizing opportunities for strategic alternatives.

Specifically, S&P Global Ratings downgraded WBD’s debt on May 20 to BB+, a level below investment grade. The analyst views this as an “ironically positive” development for WBD’s equity, especially as the company navigates its onerous debt load.

Although WBD benefits from an extended debt maturity cycle at a low average coupon, a significant inhibiting factor for strategic actions was its two-pronged change of control covenant.

This covenant stipulated that both a change of control itself and a subsequent ratings downgrade to high yield were necessary for the debt to become callable.

However, with S&P having already downgraded the debt to high yield, the analyst believes this “double-trigger” can no longer be tripped, thereby reducing the risks associated with pursuing strategic actions.

The analyst further detailed that in December, WBD announced a new corporate structure designed to enhance strategic flexibility and create potential opportunities to unlock shareholder value.

Under this reorganization, WBD now operates in two distinct divisions: Global Linear Networks and Streaming and Studios.

The analysts explained that Global Linear Networks will focus on maximizing profitability and free cash flow to continue deleveraging, while Streaming & Studios will concentrate on driving growth and achieving strong returns on invested capital.

For 2025, Ehrlich projected WBD revenues of $38.2 billion and earnings per share of $1.63.

WBD Price Action: WBD stock is trading lower by 0.25% to $9.945 at last check Monday.

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