The Warner Music Group is refinancing its debt to achieve lower interest rate payments, with expected savings to total nearly $30 million annually, according to a report from Moody’s Investors Service.
But the new issues will also raise the company’s debt total by $170 million, leaving it at about $3.1 billion. That increase in debt — combined with slower than expected realization of synergies saving from the Parlophone acquisition and near-term underperformance due to a release schedule weighted to the second half of the year — resulted in Moody’s downgrading the company’s corporate family rating to B2 from B1. (Moody’s corporate family ratings reflect its opinion of WMG’s ability to honor all of its debt. Both the B1 and B2 ratings are considered ‘speculative grade’ debt in the Moody’s ratings system.)
According to Moody’s, WMG will issue $935 million in notes in two tranches: $275 million in senior secured notes; and $660 million in senior unsecured notes.
The funds raised from the debt offering will be used to redeem $765 million in senior unsecured notes carrying a 11.5% interest rate, according to Moody’s. While the new debt has yet to be priced, the interest rate implied by the savings works out to total a rougly 6% yield for investors, but the pricing for the two tranches likely will be higher than that for the unsecured piece and lower for the secured notes.
In addition to carrying an extra $50 million in cash on the balance sheet, the funds will also be used to pay $120 million in prepayment penalties for retiring the 11.5% notes ahead of the 2018 redemption date, according to Moody’s.
According to sources familiar with the deal, the company made the move to refinance debt to capture interest payments savings, raise incremental cash, extend the maturity on debt and to take advantage of current strong market conditions for a debt offering.
Since acquiring WMG in July 2011, this deal marks the third time that Access Industries has refinanced the company’s debt. After the tender offer for the notes are completed, WMG’s balance sheet will carry about $3.1 billion in debt: the $275 million in new senior secured notes, due 2022; $660 million in senior unsecured notes, also due in 2022; a $1.3 billion term loan, including the $820 million new term loan used to finance the Parlaphone acquisition, due in 2020; $500 million in senior secured notes due in 2021; $225 million in senior secured notes; and $150 million in senior unsecured high-yield notes. The latter carry a 13.5% interest payment, which are due to mature in October 2019 but are callable on Oct. 1, 2015.
According to the Moody’s report, authored by VP and senior analyst Gregory Fraser, WMG’s will have a 6.9-to-1 ratio of debt to EBITDA (earnings before interest, taxes, appreciation and amortization) at the end of fiscal 2014. That means Moody’s expects WMG’s EBITDA to total about $450 million in the current fiscal year.
During the year, Moody’s expects WMG to face a liquidity strain as it wrestles with an estimated $50 million in capital expenditures, due to its real estate relocation, an IT upgrade and further costs in integrating the Parlaphone acquisition. But its $150 million revolver credit facility, which hadn’t been drawn down as of the end of the company’s fiscal year on Sept. 30, 2013, will likely alleviate that strain.
For the fiscal year ended Sept. 30, 2013, WMG reported a net loss of $198 million on sales of $2.87 billion. In preparing data for the new offering, WMG recalculated performance for a 12-month period ended Dec. 31 so that bond investors would have the latest data. For that 12 month period, the company reports a net loss of $155 million on sales of $2.92 billion.
On March 25, WMG announced that its executive VP/CFO Brian Roberts has resigned, but will stay with the company until the end of its fiscal year on Sept. 30.
