Moody’s Eyes CBS, Viacom Debt Ratings Changes After Merger Announcement

Credit ratings agency readies CBS for downgrade, Viacom for upgrade
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Moody’s Investors Service has placed CBS and Viacom debt ratings up for review, adding that it will likely downgrade the broadcaster’s overall credit rating while boosting that of Viacom’s.

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Viacom and CBS announced Tuesday their plans to merge in an all-stock deal that would create a company valued at about $30 billion. After the merger is completed, expected by the end of the year, current CBS shareholders would own about 61% of the combined entity, to be named ViacomCBS, with current Viacom shareholders controlling the rest.

In a press release Wednesday, Moody's said it was placing CBS debt ratings up for review for possible downgrade, mainly because of Viacom’s reliance on ad and affiliate fee revenue. At the same time, the ratings agency said it would review Viacom’s debt for possible upgrade.

“Viacom relies heavily on advertising and affiliate revenue from its large group of cable networks, which face mounting structural headwinds from accelerating pay-TV subscriber losses,” Moody’s senior VP Neil Begley wrote. “While Viacom's handful of ‘flagship brands’ as a whole lead basic cable groups in every ratings demographic, individual network viewership is low given the nature of these niche channels which has resulted in difficult distribution negotiations and relations.”

But Begley added that the combination will prove well for Viacom.

“[A] combined CBS-Viacom would have a larger, more-diverse content offering and international footprint, and in Moody's opinion will become more powerful when competing for and producing content, while wielding more power with traditional and virtual MVPDs in contract renegotiations -- which Moody's views as more important to Viacom,” Begley wrote. “The merged company would also be able to offer a richer DTC product.”

On a conference call with analysts on August 13, CBS acting CEO Joe Ianniello -- who will become chairman and CEO of the CBS unit after the merger closes -- said there is ample room for growth in retransmission consent and affiliate fees at the combined company. He estimated that ViacomCBS attracts about 22% of total TV viewership with its content properties, yet receives about 11% of the economics. 

“There is significant revenue upside that we should be going after,” Ianniello said on the call.

Moody’s said the review will focus on the organizational structure and debt structure, financial policy, and strategic direction for the combined company's assets. ViacomCBS is expected to be a single debt issuer, which Moody’s said “would result in a clean transition for bondholders under a unified credit and ratings. If they are not combined into a single debt issuer, the ratings outcome will depend on whether potential guarantees are put in place and whether such a structure would structurally subordinate the debt of one of the companies.”

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