As traditional cable and media industry players look to strategic mergers and acquisitions (M&A) to survive in an age of cord-cutting and new subscription-based direct-to-consumer entertainment packages, major players are shelling out big time for blockbuster deals. Media mergers between AT&T Inc. (T) and Time Warner and Comcast Corp. (CMCSA) and Twenty-First Century Fox Inc. (FOXA) would produce two of the most indebted companies in the world, as reported by The Wall Street Journal.
On a larger scale, the deals represent the mounting pile of corporate debt that has also grown in relation to corporate earnings over the past decade, posing a threat to companies as interest rates rise and the economy slows. (See also: Megadeals Push Global Takeovers Past $1.2 Trillion.)
Investors Worry Over Rising Leverage
AT&T and Comcast's deals go through, the companies will carry a combined $350 billion of bonds and loans, according to data from Moody's Investors Services and Dealogic, as reported by the WSJ. This unprecedented debt burden will carry a large amount of risk for investors in the firms' bonds and leave little to no leeway for the companies to successfully execute on their merger plans.
As total worldwide corporate debt, excluding financial institutions, currently stands at roughly $11 trillion, investors are becoming more concerned in regards to how firms will refinance the debt when the next market downturn hits.
"We are getting a lot of calls," said Allyn Arden, a telecom and cable analyst at S&P Global Ratings, as cited by the WSJ. Last week, both S&P and Moody's reduced their rating on AT&T bonds to a level just two notches above junk debt. They are expected to also downgrade Comcast, whose offer for Fox at $35 per share has exceeded Walt Disney Co.'s (DIS), at $29.54 per share.
A great amount of confidence is resting on the media companies' ability to quickly repay debt used for the acquisitions and return to pre-deal credit ratings. However, if disrupters such as Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN) continue to contribute to shrinking revenues, ratings firms could respond with more downgrades. If additional ratings cuts put AT&T or Comcast closer to the junk-bond category, some fund managers unable to hold debt rated below investment grade may start to sell bonds in anticipation.
“The risk is that everyone wants to get out of the debt at the same time,” said Mike Collins, a bond fund manager at PGIM Fixed Income, as quoted by the WSJ. “That’s when it gets ugly.” (See also: Comcast, Disney Vie for a Key Fox Asset in India.)