Zhitong Finance learned that Paramount Global (PARA.US)'s long-term debt rating was downgraded to “junk grade” by S&P, but Wells Fargo said the move may actually make it easier to acquire the company because it can relieve the obligation to repay the debt.

Previously, S&P downgraded Paramount Global's debt rating from BBB- to BB+ due to the decline in credit metrics due to the accelerated decline in cable media business and the company's shift to an uncertain (and highly competitive) streaming model. S&P expects that the ratio of free operating cash flow to debt will remain below 10%, and the adjusted leverage ratio will remain above 3.5 times after 2025.

Wells Fargo analyst Steven Cahall wrote, “We're not experts on debt terms, but we believe most of Paramount Global's debt instruments have this statement that if a rating agency switches (high yield), then it denies a change in control clauses. This means that if someone bids to buy Paramount Global, they won't need to repay and reissue debt, which greatly reduces risk.”

Paramount Global's current market capitalization is just under $8 billion, but its net debt is around $11.4 billion. Apollo proposed to buy Paramount's studio for $11 billion, which would be a price above market capitalization—but without debt.

Cahall said that if Paramount were to accept Apollo's offer, the remaining cable assets and streaming Paramount+ would be less than double the leverage ratio, EBITDA would be close to $2 billion, and the studio sale could attract higher bids because BET and Nickelodeon are other assets that can be released.

“We believe that any party interested in all or part of Paramount Global, including studios, IP, CBS, and real estate, is more likely to emerge due to the debt CoC lapse,” Cahall said. The analyst also pointed out that this created more of the combined upward potential.

However, S&P raised Paramount's outlook from a negative observation to a stable observation. Fitch Ratings and Moody's Ratings still rated the company at investment grade; Moody's long-term rating for Paramount Global was Baa3 and gave a negative review; Fitch rated Paramount Global as BBB- and gave a negative review.

CreditSights analysts, led by Hunter Martin, also wrote in a report that the credit rating downgrade could invalidate a change of control clause in Paramount Senior Notes, which would have triggered a 101 cent repurchase after the acquisition. They wrote that the company's lower-rated bonds still retained this option, and the impact of the downgrade event was loosely defined by these bonds.

They also said that the cancellation of the change of control clause in the bonds “increases the possibility that the company will be acquired by financial buyers” because less capital is required to sell the bonds. The report said that for senior bondholders, the sale could be “disastrous” because their loan contracts are weak, which may push down repayment limits further or allow the sale of assets without the proceeds being handed over to bondholders.