Warner Bros Discovery bondholders approve plan to split the company

Warner Bros Discovery (WBD) bondholders approved a plan to split the company into two publicly traded entities, separating its studios and HBO Max from its cable networks, and to buy back nearly half of its $37 billion debt. The approval removes restrictions that could have prevented the split, though some bondholders expressed concern about being left with unsecured bonds tied to the declining cable business. Despite overwhelming bondholder support for the consent solicitation, credit ratings agencies Fitch, Moody's, and S&P Global Ratings downgraded Warner Bros Discovery to junk status, triggering forced selling by funds.

Analysis

Warner Bros Discovery (WBD.O) has received overwhelming bondholder approval for a significant corporate restructuring, enabling its plan to divide into two publicly traded companies and implement a new capital structure. This strategic move will separate its studios and HBO Max streaming service from its legacy cable networks, with the latter slated to hold the majority of the company's existing debt. Concurrently, WBD plans to buy back nearly half of its $37 billion debt, largely originating from the 2022 WarnerMedia and Discovery merger. While the consent solicitation saw strong support, with up to 99% approval from certain bondholder groups, concerns persist among some investors who may be left holding unsecured bonds tied to the declining cable business, potentially lacking collateral and facing lower payment priority in a default scenario; an attempt by the law firm Aiken Gump Strauss Hauer & Field to negotiate better terms for these bondholders reportedly failed. Contrasting with the bondholder approval, credit rating agencies Fitch, Moody's, and S&P Global Ratings have all recently downgraded Warner Bros Discovery's debt to junk status, primarily citing the challenges confronting its cable networks. These downgrades have reportedly triggered forced selling by investment-grade mandated funds, contributing to net selling pressure on WBD's bonds.

Key Decisions for Investors

• Investors should closely monitor the execution details of the company split and the subsequent financial performance and capital allocation strategies of the two new, distinct publicly traded entities, as their risk-return profiles will differ significantly.
• The recent downgrades to junk status and consequent forced selling may introduce continued volatility in WBD's bond prices, creating potential entry points for investors with an appetite for higher-risk debt, while equity holders should re-evaluate valuations based on the separated entities' prospects and debt loads.
• Particular attention should be given to the debt servicing capacity and strategic outlook of the legacy cable business, which will carry a substantial debt burden, and investors should remain alert to further pronouncements from credit rating agencies regarding both new entities post-split.