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Paramount Global will start 2024 with some big bills to pay and questions swirling about its creditworthiness, in the view of a veteran S&P Global analyst.
Naveen Sarma, S&P’s Senior Director and Sector Lead for the U.S. Media and Telecom Sectors, was one of four analysts from the firm taking part in a panel discussion Tuesday at the UBS Global Media and Communications Conference. In addition to Paramount, the session touched on major challenges faced by Dish Networks, Altice USA and the broader media sector as economic models continue to shift.
Earlier this year, Sarma noted, Paramount’s credit rating was lowered from BBB to BBB-, which is the “bottom end of what we would call investment grade.” The primary motivation for the move was weaker cash flows resulting from the transition from linear TV to streaming. If the rating were to fall further, he said, “that could impact investors’ ability to hold” the company’s stock in their portfolios.
In addition to potential erosion in the institutional investor base, the company’s access to “commercial paper” (institutional loans at reasonable interest rates) could be compromised. Commercial debt is a crucial tool used by media businesses producing pricey films and TV series, whose budgets can reach into the hundreds of millions long before their release benefits the balance sheet. Plus, Paramount is going to owe $2 billion to the NFL for media rights in multiple installments over the span of a year, Sarma noted. “They don’t necessarily have the cash on the balance sheet to be able to make that payment,” he said.
“A lot of other companies have given guidance on when they think break-even is” in their streaming businesses, Sharma said. Disney and Warner Bros. Discovery, he believes, “will be able to grow EBITDA. .. It isn’t as clear-cut with Paramount. Up until a couple quarters ago, we weren’t sure when that break-even point.”
Along with streaming uncertainty, the analyst continued, “the rest of their business is facing a lot more pressures because of the size and scale of that business relative to their peers. So, cash flow for that company was negative. For other companies, they were generating cash flow. For Paramount, they weren’t. So, when we’re going to look at this company next year and make an assessment, one of the things that’s clear is, they’ve got to start generating free cash flow. They also have to show a path toward break-even with their streaming business.”
The larger sector is susceptible to many of the pressures faced by Paramount.
“The media business isn’t as good a business as it was, from a credit standpoint, 10 years ago,” Sharma said. “Back then, you had advertising on linear television. That’s moving off of linear television and onto other platforms, some of which are owned by big media companies. But there’s also leakage to other companies. The affiliate fee revenue stream, which has really held up all of media .. is in decline. And it’s really not clear to any of us whether streaming is as good a business. I’m not going to say it’s a bad business, but it’s certainly not going to be as good a business as the linear TV business. If you look at all that together, the media companies are going to have weaker cash flows than they have historically had, and that’s going to have a ratings implication from our standpoint.”
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