Paramount draws $109 billion of orders for Warner debt, but its junk bonds price near 9%, 2 points over BB peers

Paramount Skydance drew more than $109 billion of orders for the high-grade bonds that will help pay for its purchase of Warner Bros. Discovery, Bloomberg reported on Tuesday, about 3.6 times the amount it expects to sell. Demand for the loan portion was strong enough that the dollar term loan was raised to $8.5 billion from $6.5 billion, with the high-grade bond sale cut by the same $2 billion. A euro loan of about $1 billion is unchanged.

The full package is about $52 billion: roughly $32 billion of high-grade bonds in dollars and euros, about $12.4 billion of high-yield bonds and the term loans, according to Bloomberg reporting syndicated on Yahoo Finance. Bloomberg said the junk sale is on course to be the largest corporate high-yield bond deal ever. Paramount shares closed down 2.82% at $9.99, according to Nasdaq.

The number behind the $109 billion

A huge order book does not mean cheap money. Price talk on Paramount's longest-dated dollar high-yield notes was in the "low 9% area," Bloomberg reported. Compare that with the market Paramount now sits in. S&P cut the company to BB from BB+ on September 24, and the ICE BofA BB index yielded 6.85% on Monday, according to FRED. The whole high-yield index, including far weaker CCC borrowers, was at 8.03%.

In other words, Paramount is paying well above the average junk borrower to place the longest part of its debt, though its rating is at the top of the junk scale. That gap is the market's price for size and for leverage: S&P expects debt at about 7.6 times earnings before interest, taxes, depreciation and amortization after the deal. It is also why Paramount shifted money into loans. Price talk on the seven-year loan was 2.75 to 3 percentage points over SOFR, Bloomberg reported. With SOFR at 3.90% on Monday, per FRED, that works out to about 6.65% to 6.90% today, cheaper than the junk bonds.

The trade-off

The loan floats. Every quarter-point rise in SOFR adds about $21 million a year in interest on the $8.5 billion dollar loan, by our math. Fed officials have been signaling more hikes, and prediction markets were pricing a 68% chance of an October move, as we reported today. Paramount is swapping a higher fixed cost for a lower cost that could climb.

For the wider credit market, the deal is a useful signal. Investors clearly have cash for large, secured corporate debt even with Treasury yields near multi-decade highs. But they want to be paid for it, and the 30-year Treasury closed at 5.59% on Tuesday. Companies with smaller balance sheets that need to refinance will face the same math with less leverage to bargain.

What traders watch next

Final pricing on each tranche, the closing of the Warner purchase, which Yahoo's report put at an estimated October 7, and whether Warner shares, at $30.86 against a $31 cash offer according to 24/7 Wall St, stay pinned to the deal price. Our earlier coverage: the loan launch and the jump to about $80 billion of debt, and September's junk bond selloff.

Sources: Bloomberg, Yahoo Finance, 24/7 Wall St, ICE BofA indexes and SOFR via FRED, U.S. Treasury, Nasdaq. Yield comparisons and interest arithmetic by The Company Chronicle. This is market information, not investment advice.