The Ellison Credit Complex Gets a Little More Complex

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We once joked that Warner’s buyouts were harbingers of a financial apocalypse. The superstitious should therefore mark next week – the date on which the latest takeover bid should be finalized – in their calendar, thanks to the willingness of bond investors to part with their money.

But Paramount Skydance, the bond issuer and acquirer of Warner Bros, is a great investment grade company, right? And even though $52 billion is still a lot of corporate bonds for which debt capital market teams must find a home, large investment grade firms appear to be selling large quantities of bonds on a weekly basis.

S&P Global Ratings, September 24:

We have lowered our issuer credit rating on PSKY (Paramount Skydance) from ‘BB+’ to ‘BB’ as we expect leverage to increase when the acquisition closes shortly.

Wait, what? The double B apartment is not investment grade, it is junk.

Fortunately for investment grade bond investors, Paramount Skydance didn’t let a little thing like being rated junk prevent the issuance of a monster batch of investment grade bonds.

Quite unusually for a public debt transaction of this scale, they provided additional credit support in the form of a special senior duty. And as S&P Global Ratings explains in its “recovery rating” report ($):

Depending on the recovery assessment for a given debt issue, the issue rating is derived from the debt issuer’s credit rating up, down or not at all.

Ratings analysts estimate that in the event of a default, bondholders who benefit from this senior right will recover 90 to 100 cents on the dollar. At least that’s what they estimate if their default scenario of 2031 comes true.

The 2031 default scenario imagines a world in which the company runs into difficulties, decides it needs to restructure its debt, but still generates $10.2 billion in ebitda, giving it an enterprise value of approximately $63 billion (after accounting for all bankruptcy administration costs).

First lien bondholders are about to get first access to that imagined $63 billion in enterprise value, and those accesses push the bond’s rating up to BBB-, despite being issued by a BB-rated company. Good.

Are there other credit supports that help the company get above the IG ($) rating line? Our priority:

Our ratings on PSKY reflect (sic) the commitment of the Ellison familythe controlling entity of the company, to take all necessary measures to reduce its leverage below 3.75x on a net debt basis (as defined by the company) by 2028 and to 3.0x by 2029.

Of course.

David Ellison is the CEO of Paramount Skydance. He is also the son of Larry Ellison. And Larry Ellison, according to Bloomberg’s Billionaires Index, is worth $187 billion — based largely on the value of his holdings of Oracle Corp. common stock. The fact that the owner of 40% of the global AI hyperscaling heavyweight is committed to taking all necessary measures to reduce its debt should be quite reassuring for credit investors.

We checked how investors assess the creditworthiness of the global AI hyperscaler. We have also incorporated the new Paramount Skydance bonds and all other triple B rated US corporate bonds from the ICE BofA Index into the chart.

It increasingly appears that two large issuers are being assessed as having much higher credit risk premiums than the others. Both are at the lower end of the investment ladder and are both Ellison family companies.

Plus, as IFR’s Chris Whittall pointed out today, the cost of insuring Paramount’s debt against default using credit default swaps has skyrocketed. And this commitment from the Ellison family doesn’t seem to have helped (address to Dec Mullarkey, who also reported this correlation):

This could partly be due to dissatisfaction among holders of the new PSKY bonds who are looking to get rid of risk. An IFR ($) article reports that the new 10-year bonds fell nearly five points shortly after they were issued, suggesting that perhaps not everyone was interested in the long term.

But, given its long history, the cyan line on Paramount’s CDS most likely refers to bonds issued specifically by the Primordial subsidiary of Paramount Sky Dance to whom the undertaking was apparently given. S&P gives this subsidiary’s unsecured debt a modest B plus.

Still, if the new PSKY debt doesn’t seem to have been absorbed as well, at least we won’t whisper that indices are manipulated and passive funds run by bots are stuffed. Because the odd timing of the bail deal all but guarantees that the victims have, thus far, all been active human decision-makers.

As MainFT reported on Wednesday, Paramount Skydance rushed to sell bonds to complete the acquisition of Warner Bros. Discovery “before the third-quarter deadline to avoid heavy penalties.” And that rush saw them sold off on September 30: not a good day for any corporate bond index aspirant.

The deadline for inclusion in the Bloomberg indices – think the major US and global Agg indices – is two business days before the last business day of the month, Monday September 28. For the ICE BoA Corporate Bond Indices, the month-end rebalancing deadline is three business days before the end of the month, Friday September 25. And the iBoxx USD Liquid Investment Grade maturity indices require new issues to be settled by the last day of the month. The new Paramount Skydance bonds will settle on October 5.

It is therefore unlikely that investors who were quasi-passive or actually tracking the index would have rushed in. And active managers didn’t need to worry about the performance cost relative to the benchmark if they missed a trade that performed strongly, at least for the next month.

Further reading:
— Are Warner’s buyouts the harbingers of a financial apocalypse? (FTAV)
— Everything you never wanted to know about issuing on the corporate bond market (FTAV)