MW Warner Bros. Discovery bonds see big selloff as ratings are cut to junk. Should stock investors be worried?

By Lukas I. Alpert

Confusion over how the media giant plans to restructure its debt following a spinoff of cable channels like CNN and TNT have rattled the market for its bonds

Warner Bros. Discovery Inc.'s plan to spin off television channels like CNN, TNT and Food Network from its studio and streaming businesses is causing angst in the bond market, with a big selloff following ratings downgrades of the company's debt to junk status.

Bond traders unloaded hundreds of millions of dollars worth of Warner Bros. Discovery bonds on Wednesday after all three major ratings agencies - Fitch, Moody's and S&P - downgraded the company's debt amid confusion over how it would be restructured following a split.

Fitch and Moody's moved their ratings for the bonds from the lowest level of investment grade to junk, as high-yield corporate debt is known. S&P already had Warner Bros. Discovery at a junk rating, but downgraded it one notch further late Tuesday. The downgrades result in Warner Bros. Discovery becoming a "fallen angel," the term for companies whose bonds are reduced from investment grade to junk.

Much of Wednesday's selloff was likely triggered by rules at many trading firms that don't allow them to hold anything but investment-grade bonds in their portfolios, according to analysis provided by data-solutions provider BondCliQ.

The decline in the bond ratings comes just three years after the Warner Bros. film studio and television business was acquired for $43 billion by Discovery/ The merger led to one of the largest corporate bond issuances ever, with a sale of $30 billion in debt.

Meanwhile, the company's new junk status hasn't yet scared off investors in its stock. Warner Bros. Discovery shares (WBD) traded up at much as 13% in intraday trading Monday after the spinoff was announced. Although those gains have since been pared, the stock remains up about 5% since Friday's close.

There is some reason for worry, however. Debt rated in junk territory, and the subsequent selloff in the bonds, would make it more costly for the company to borrow money, which in turn could impact its bottom line. In the first quarter, Warner Bros. Discovery recorded net interest expenses of $468 million and a net loss of $453 million.

When the company declared its intention to split, it also announced a tender offer in which it would utilize a $17.5 billion bridge loan to refinance parts of its existing debt. But there has been some confusion among traders about which of the company's existing bonds would be refinanced and at what terms.

"There is low visibility on the post-transaction capital structure for RemainCo. It will absorb approximately half of the refinanced bridge facility, implying roughly $8.75 billion of new secured debt, senior to any remaining [Warner Bros.] bonds not tendered back to the company," Fitch wrote in a note explaining why it was downgrading the company's bonds. "Based on this, we estimate that RemainCo.'s gross leverage will be in the mid 4x area, similar to the current leverage of the combined company. Fitch views this estimated leverage level as aggressive, particularly for a business segment facing declining revenues and margin compression."

Following the downgrades, Warner Bros. Discovery tried to calm the situation by issuing a release explaining in more detail how it intended to handle the new bond issuance and allocate the debt among the two eventually separated companies.

"This is subject to continuing evaluation and revision and depends on a number of factors, including the proceeds expected from the monetization of the retained stake and the receptivity of capital markets," the company wrote in the filing.

-Lukas I. Alpert

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June 11, 2025 15:30 ET (19:30 GMT)

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