Viacom’s about to hit the debt market with a rating that makes it just barely acceptable for pension funds, colleges and others restricted to so-called investment-grade vehicles. Moody’s Investors Service this morning dropped its rating for the entertainment company’s senior unsecured long-term offerings to Baa3 from Baa2.
That’s just one step above what it deems as speculative — or, colloquially, junk — status.
The change could be important: Viacom needs cash. It has nearly $11 billion in debt with $400 million due this year, $1 billion in 2017 and $500 million for 2018. A lower debt rating means that Viacom likely will have to offer higher interest payments to entice lenders.
Former CEO Philippe Dauman’s effort to sell nearly half of Paramount was designed partly to bolster the balance sheet. The board said Wednesday that it ended that process with the studio “in order to consider all options available to the Company.”
Analysts speculate that options could include a merger of Viacom and CBS, or even a sale of the studio or Viacom. CBS chief Les Moonves said last week that he’s “not in active discussion” for a reunion with Viacom; the companies, both controlled by Sumner Redstone, were split a decade ago.
Today’s drop “reflects the continued weaker-than-anticipated rebound in the company’s operating performance and cash-flow contributions, and our expectation for higher near-term adjusted leverage,” Moody’s says.
The firm likes Viacom’s decision to cut its dividend in half. But that “will not on its own be sufficient to materially reduce gross debt and adjusted leverage to levels consistent with the higher Baa2 debt rating in the intermediate term.”
Meanwhile, the plan to borrow additional cash “will delay deleveraging and reduction in absolute debt as was previously anticipated by Moody’s in its estimates.”
The ratings company believes that Viacom’s new board, and whoever replaces interim CEO Tom Dooley, will “take steps to de-lever the balance sheet and strengthen financial flexibility.” It also expects the Media Networks business to improve next year with higher ad sales and “moderate contractual escalations in its network affiliate agreements.”
If that doesn’t happen, then Moody’s warns it could drop Viacom to junk status “even if financial metrics are
reflective of an investment-grade credit profile.”