Paramount to write some big checks in 2024 while credit rating still being tested, says S&P Global Analyst: ‘They need to show a way’

Paramount Global will enter 2024 with some big bills and questions about its creditworthiness, according to a veteran analyst at S&P Global.

Naveen Sarma, S&P senior managing director and sector leader for the US media and telecommunications sector, was one of four corporate analysts who participated in a panel discussion at the UBS Global Media and Communications Conference on Tuesday. In addition to Paramount, the session addressed the major challenges facing Dish Networks, Altice USA and the media industry in general as economic models continue to change.

Sarma noted that earlier this year Paramount’s credit rating was downgraded from BBB to BBB-, which is the “low end of what we would consider investment grade.” The main reason for this move was weaker cash flow due to the shift from linear television to streaming. If the rating drops further, he said, “it could affect investors’ ability to hold the company’s shares in their portfolios.”

In addition to the possible erosion of the institutional investor base, the company’s access to commercial paper (institutional loans at reasonable interest rates) may also be at risk. Commercial debt is a crucial tool for media companies that produce expensive films and television series whose budgets can reach hundreds of millions long before their release hits the balance sheet. In addition, Paramount owes the NFL $2 billion for media rights in several installments over a year, Sarma noted. “They don’t necessarily have enough money on the balance sheet to be able to make that payment,” he said.

“Many other companies have provided guidance on when they believe they will break even in their streaming businesses,” Sharma said. He believes that Disney and Warner Bros. Discovery “EBITDA will be able to grow. .. At Paramount it is not so clear. Until a few quarters ago, we didn’t know when we would break even.”

In addition to the increasing uncertainty, the analyst continued, “the rest of its business is under much more pressure due to the size and scale of this company compared to its peers.” Cash flow for this company was therefore negative. They generated cash flow for other companies. This was not the case at Paramount. When we look at this company next year and do a valuation, one thing is clear: they need to start generating free cash flow. They also need to show a way to break even with their streaming business. “

The larger industry is sensitive to many of the pressures Paramount is facing.

“From a credit perspective, the media sector is not as good a business as it was 10 years ago,” said Sharma. “Then there were commercials on linear television. It is moving from linear television to other platforms, some of which belong to large media companies. But there are also leaks to other companies. The revenue stream for affiliate fees, which really let all media down, is declining. And it’s not really clear to any of us if streaming is such a good thing. I’m not going to say it’s a bad thing, but it certainly won’t be as good a business as the linear TV business. When you look at all of this together, media companies will have weaker cash flow than in the past and that will affect ratings in our view.”