Zhitong Finance learned that the long-term debt rating of Paramount Global (PARA.US) was downgraded to "junk" by S&P, but Wells Fargo said the move could actually make it easier to acquire the company by relieving the obligation to repay the debt.

Previously, S&P downgraded Paramount Global's debt rating from BBB- to BB+, citing the accelerated decline of cable media business leading to the decline of credit indicators, as well as the company's transition to an uncertain (and competitive) streaming model. S&P expects the ratio of free operating cash flow to debt to remain below 10%, and the adjusted leverage ratio after 2025 will remain above 3.5 times.

Wells Fargo analyst Steven Cahall wrote,"We are not experts in debt terms, but we believe that most of Paramount Global's debt instruments have this provision, that if a rating agency turns to (high yield), it negates the change in control clause. This means that if someone bids to acquire Paramount Global, they will not need to repay and reissue debt, which significantly reduces risk."

Paramount Global's current market value is slightly less than $8 billion, but net debt is about $11.4 billion. Apollo proposed to buy Paramount's studio for $11 billion, a price higher than the market value,but without debt.

Cahall said that if Paramount accepts Apollo's proposal, the remaining cable assets and streaming Paramount+ would have a leverage ratio of less than 2 times, EBITDA would be close to $2 billion, and the sale of the studio could attract higher bids as BET and Nickelodeon are other releasable assets.

Cahall said:"We believe that because the debt CoC fails, any party interested in all or part of Paramount Global, including studios, IP, CBS and real estate, is more likely to appear."The analyst also pointed out that this creates more potential for parts to be combined together to form an upward trend.

However, S&P upgraded Paramount's prospects from negative to stable. Fitch Ratings and Moody's Ratings still have investment-grade ratings for the company; Moody's long-term rating for Paramount Global is Baa3 with a negative outlook; Fitch's long-term rating for Paramount Global is BBB-, with a negative outlook.

CreditSights analysts led by Hunter Martin also wrote in a report that the credit rating downgrade could invalidate a change of control provision in Paramount's preferred notes, which originally triggered a repurchase at 101 cents after the acquisition. They wrote that the lower-rated bonds of the company still retain this option, which defines the impact of the downgrade event more broadly.

They also said that canceling the change of control provision in the bonds "increases the likelihood of the company being acquired by financial buyers" because less money is required to sell the bonds. The report said that the sale could be "disastrous" for senior bondholders because their loan contracts are weak and may further push down repayment levels, or allow the sale of assets without the proceeds being given to bondholders.