Some Paramount bonds were yielding over 10% Thursday after prices of some of the media and entertainment company's big new debt deals declined in initial trading.
The company issued about $52 billion of debt and bank loans Wednesday to finance its $81 billion purchase of Warner Bros. Discovery, which is set to close next Tuesday. Those bonds began trading Thursday.
Paramount was able to get the large deal done against a tough backdrop of rising Treasury yields and wider spreads on high-yield corporate debt.
But the underwriters may have priced the bonds too high.
One big new issue, $6 billion of 8.25% second-lien debt maturing in 2031 with expected junk-grade ratings, was trading at $97.50, down over 2% from a price of par-$100-at the pricing, Bloomberg data showed.
Paramount's senior unsecured corporate bonds that had been outstanding before the new debt deal were coming under more pressure because they are junior to all the new debt. In bond parlance, the existing debt got "primed."
The 6.875% 10-year bonds due in 2036 were trading at $79, down 6 points from $85 on the close Wednesday, according to the TRACE bond pricing information service. The yield has risen to 10.4% from 9.25%. They carry as a result carries junk-grade ratings of single-B2 from Moody's and single-B-plus from S&P Global Ratings.
"Paramount floated the largest high yield bond offering in history this week, and the bonds sold off immediately in trading afterwards. This is not a sign of a strong market." Jeff Gundlach, the founder and chief investment officer at bond asset manager DoubleLine, wrote on X.
The bond market reaction wasn't helping Paramount stock, which was off 4.7% to $9.85 Thursday.
Paramount's existing public senior debt carries lower junk-grade ratings of single-B2 from Moody's and single-B-plus from Standard & Poor's. The new debt is expected to carry a mix of investment-grade and junk ratings.
After the Warner deal, Paramount is expected to carry about $80 billion of net debt, a stiff seven times projected 2026 earnings before interest, taxes, depreciation and amortization, or Ebitda.
The company will try to pull off a corporate coup by significantly reducing debt while cutting costs against a tough and competitive media and entertainment backdrop. Rivals like Disney and Netflix aren't burdened with highly leveraged balance sheets, giving them greater financial flexibility than Paramount.
The company has aggressive targets for boosting Ebitda by $6 billion annually and cutting debt to under four times Ebitda by 2028-a more manageable level. Most big companies try to keep debt to no more than three times annual Ebitda to preserve investment-grade bond ratings and financial flexibility.
"The company continues to face significant strategic and execution risks. The secular decline of linear television will remain a meaningful headwind to revenue, earnings and free cash flow growth, while rising sports rights costs, streaming integration and subscriber churn, and execution of a multi-year restructuring program create additional challenges," wrote analysts at Moody's.
"Free cash flow will remain constrained by elevated interest expense, restructuring costs and integration spending, making successful delivery of targeted synergies and deleveraging objectives important to the company's future credit trajectory," the rating agency added.
The Paramount debt offers a less risky alternative to the company's stock and is senior to the company's equity, which is controlled by the Ellison family, including CEO David Ellison and his father, Larry Ellison, who is a big financial backer of the company.