OVERVIEW

Paramount Skydance (SKYD) closed its acquisition of Warner Bros. Discovery on 6 October with USD 89.3bn of gross debt and Debtwire estimated cash of USD 5.0bn. We measure leverage on 2027E, the first full year after close. Our 2027E Base-case adjusted EBITDA of USD 13.7bn includes USD 1.75bn of realized synergies, the portion of management’s USD 6.0bn run-rate target we expect SKYD to achieve by 2027. On that basis, net leverage at close is 6.16x.

Our Base case leaves SKYD short of management’s targets. It assumes synergies of USD 1.75bn in 2027E, USD 3.75bn in 2028E and USD 5.1bn in 2029E, broadly in line with management’s timeline, along with continued growth in DTC and Studios. It excludes asset sales and equity issuance, does not reach the full USD 6.0bn synergy target before 2030E, and assumes Linear EBITDA continues to decline. On that basis, we project net leverage of 5.1x in 2028E and 4.4x in 2029E, against targets of below 3.75x and 3.0x. In 2029E, net debt would be about USD 23.4bn above the level consistent with 3.0x. Even in our Bull case, which delivers the full synergy target by 2029E, leverage only reaches 3.1x. Deleveraging is back-end loaded, and we expect SKYD to draw on its revolver to meet USD 13.0bn of maturities in 2028E-2029E. In our Bear case, the revolver is fully drawn from 2028E and net leverage rises to 7.6x by 2030E.

Market pricing already reflects a weaker credit than the ratings suggest. Paramount Global 5Y CDS has widened to 577bps from 268bps in mid-September, while the CDX North American High Yield index was broadly flat. The second-lien 2034s trade 169bps wide of the single-B index despite a BB rating from S&P.

Rating change

S&P cut SKYD to BB from BB+ on 24 September and on 12 October aligned WBD with its parent. It lowered WBD’s issuer rating to BB from BB+ and the remaining WBD unsecured notes to BB- from BB. Moody’s withdrew WBD’s Ba1 corporate family rating (CFR) and downgraded the Discovery Global Holdings (DGH) and Discovery Communications (DCL) unsecured notes to B2, two notches below SKYD’s Ba3 CFR. Both agencies cite the notes’ lack of a SKYD guarantee and their position behind USD 73.3bn of secured debt. Moody’s also flagged concentrated ownership and the priming of existing unsecured holders.

DEBT & LIQUIDITY

Net debt is USD 84.3bn after Debtwire estimated cash of USD 5.0bn at close. Secured debt of USD 73.3bn makes up 82% of the stack. First-lien debt of USD 48.3bn, including an estimated USD 3.85bn refinancing of WBD’s AR securitization, is leveraged at 3.5x 2027E EBITDA. The USD 25.0bn of second-lien debt, including USD 12.6bn of WBD exchange notes, takes secured leverage to 5.4x. Behind the secured debt sit USD 11.7bn of Paramount Global senior unsecured notes and USD 1.6bn of Paramount Global junior subordinated debentures, which rank below the senior notes. A further USD 2.7bn of WBD senior unsecured notes remain at the WBD issuers, without a guarantee from SKYD.

Liquidity at close is an estimated USD 10.0bn: USD 5.0bn of cash and the undrawn USD 5.0bn revolver. We estimate liquidity will stay flat at USD 10.0bn at end-2027E, as FCF after dividends of USD 0.9bn exceeds USD 585m of maturities and allows for USD 312m in TLB repayments. Maturities rise to USD 4.5bn in 2028E and USD 8.5bn in 2029E. Base-case FCF after dividends of USD 3.5bn in 2028E and USD 5.8bn in 2029E falls short of these maturities by USD 1.0bn and USD 2.7bn. We assume SKYD keeps cash at the USD 5.0bn level estimated at close rather than running it down, so we expect it to fund the shortfall on the revolver: USD 1.0bn drawn in 2028E and USD 3.8bn outstanding at end-2029E, repaid in 2030E. Relative to the Base case, the Bear case assumes faster Linear declines, slower DTC and Studios growth, and USD 1.8bn less in synergies by 2030E, which leaves 2030E EBITDA at USD 11.3bn rather than USD 17.2bn. Cumulative FCF before dividends over 2027E-2030E falls to USD 2.2bn from USD 21.4bn, so gross debt rises to USD 91.2bn instead of falling to USD 71.8bn. In that case, the revolver is fully drawn from 2028E and liquidity falls to the USD 5.0bn cash balance.

The term loan A and revolver carry maintenance covenants of 5.50x total net and 3.25x first-lien net leverage, tested quarterly on Consolidated Adjusted EBITDA as defined in the credit agreement. The definition adds back pro forma run-rate synergies related to the WBD acquisition, net of synergies already realized, with no cap, along with costs to achieve. Covenant EBITDA therefore credits the full USD 6.0bn synergy target from close. On that basis, total net leverage at close is about 4.51x on LTM June 2026 EBITDA. In 2027E, total net leverage is 4.63x and first-lien net leverage 2.38x, within both tests, even though net leverage on realized-synergy EBITDA is 6.16x at close.

The first-lien notes restrict liens, asset sales and mergers, but not debt incurrence or restricted payments. Xtract estimates, based on the preliminary offering memorandum, about USD 9.35bn of additional first-lien capacity, and asset sale proceeds can be reinvested. The documents allow debt to be added ahead of the second lien and unsecured notes, and they do not require deleveraging.

The first-lien collateral is released only at investment grade with the term loan B (TLB) at USD 250m or less, which is not in view with Debtwire estimates of USD 6.8bn of USD TLB outstanding at end-2030E. The second-lien notes can be redeemed 10% a year at 103% or through a 40% equity clawback at 107.000% to 109.125%. With the USD second-lien notes trading at 93.58 to 96.88 and the EUR notes at 98.10 as of 13 October, open-market repurchases are cheaper than either.

FORECAST

Our 2026E combines 1H26 actuals with 2H26 estimates, with Paramount set at its guidance of USD 30.0bn of revenue and USD 3.85bn of adjusted EBITDA. We estimate 2026E revenue declines 2.7% YoY to USD 64.9bn, while adjusted EBITDA rises 3.4% to USD 12.4bn.

We project 2027E revenue of USD 66.1bn, up 1.8% YoY. 10% direct-to-consumer (DTC) growth and a 6% recovery in Studios more than offset a 7% decline in Linear, which comprises Paramount’s TV Media and WBD’s Global Linear Networks segments (broadcast and cable networks). We estimate 2027E adjusted EBITDA of USD 13.7bn, including USD 1.75bn of realized synergies. Excluding synergies, adjusted EBITDA falls 3.9% YoY to USD 11.9bn as Linear EBITDA declines by approximately USD 1.4bn.

We project 2027E FCF before dividends of USD 2.0bn. After the annual common dividend of USD 1.07bn (USD 0.21 per share on 5.04bn shares), FCF of USD 897m supports only modest debt repayment, covering USD 585m of maturities and USD 312m of TLB repayment.

Deleveraging accelerates from 2028E as realized synergies build to USD 5.4bn by 2030E and costs to achieve fall away. Adjusted EBITDA rises to USD 17.2bn and gross debt declines to USD 71.8bn by 2030E. Linear, approximately 79% of 2026E adjusted EBITDA excluding synergies, falls to USD 5.3bn over the period even with revenue declines slowing to 6%-7% a year, so synergies rather than the underlying business drive the improvement.

On realized-synergy EBITDA, we project net leverage of 5.13x in 2028E and 4.39x in 2029E. Projected net debt of USD 79.6bn in 2028E and USD 73.8bn in 2029E would be USD 21.4bn and USD 23.4bn above the levels consistent with management’s targets of below 3.75x and 3.0x. Delivering the full synergy target does not close the gap. Crediting the full USD 6.0bn, leverage is 4.48x and 4.17x, and our Bull case, which reaches the full target by 2029E, ends 2029E at 3.11x. Reaching the targets would likely require equity. A USD 10bn raise applied to debt would bring 2029E leverage to 3.80x, while suspending the dividend would add approximately USD 4.3bn of debt reduction through 2030E.

Our Bull case reaches 4.00x in 2028E, meeting the 2028 target only when the full synergy target is credited (3.75x). In our Bear case, adjusted EBITDA stays near USD 11.9bn through 2029E and FCF before dividends is negative USD 533m in 2027E. The revolver is fully drawn from 2028E, new debt reaches USD 13.0bn by 2030E and net leverage rises to 7.63x.

Key risks:

• Synergy delivery: Synergies drive all Base-case EBITDA growth. At USD 3.6bn (Bear), leverage rises.
• Linear decline: We assume revenue declines ease to 6%-7% from 10.4% in 2026E, helped by affiliate fee increases and sports. If declines stay at the 2026E pace, 2029E net leverage rises to about 4.7x from 4.39x.
• Content spending: We expect SKYD to spend USD 24.4bn of cash on content in 2027E, USD 1.4bn more than the USD 23.1bn of content cost deducted in EBITDA, reducing FCF by the difference. If spending stays at WBD’s 1H26 rate, the gap would be about USD 0.6bn larger.
• Refinancing: In the Bear case, the USD 5.0bn revolver is fully drawn in 2028E and SKYD still needs USD 2.6bn of new debt to meet that year’s maturities, rising to USD 13.0bn by 2030E.
• Capital allocation: The USD 1.07bn annual dividend absorbs 54% of 2027E FCF before dividends. Suspending it would allow for approximately USD 1.1bn a year for debt reduction.

CDS ANALYSIS

Paramount Global 5Y CDS has widened sharply since mid-September, while peers and the broader market moved far less. Spreads were broadly stable at 270bps-290bps from June to mid-September, reaching 268bps on 17 September. They widened to 352bps by 24 September, 499bps on 8 October and 577bps on 13 October, more than doubling from the September low. Between 17 September and 8 October, Paramount Global CDS rose 86%, while Netflix and Disney CDS rose 10% and 14%, respectively, and the CDX North American High Yield index was broadly flat. The move is therefore specific to SKYD rather than sector- or market-driven. The widening reflects both higher default risk of the combined company and lower expected recovery on the deliverable obligations, and it accelerated after the 6 October closing.

RELATIVE VALUE VALUATION

SKYD’s secured notes trade wide of their ratings. We compare on option-adjusted spread (OAS), which removes the value of the notes’ call features, so callable bonds can be compared on a like-for-like basis with the ICE BofA indices. The 7.050% first-lien 2031s (BBB-) trade at 272bps OAS, 170bps wide of the BBB index and 87bps wide of the BB index. The 8.875% second-lien 2034s (BB) trade at 483bps OAS, 169bps wide of the single-B index. As of 7 October, long-dated Paramount unsecured notes trade at 46.53 to 62.90, yielding 10.47% to 12.63%, reflecting their position behind USD 73.3bn of secured debt. Overall, the market is pricing SKYD closer to Debtwire’s Base case than to management’s targets.

Disclaimer:

This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as investment advice. ION Analytics does not provide any investment advice, and clients should consult with their own financial advisor for matters requiring investment advice. All information is sourced from either the public domain or ION Analytics data or intelligence, and ION Analytics cannot and does not verify or guarantee the adequacy, accuracy, or completeness of any source document. No representation is made that it is current, complete, or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and ION Analytics accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.