Warner Music Group Corp. Upgraded To 'BB-' On Strong Operating Performance And Positive Industry Trend; Outlook Stable

  • Warner Music Group Corp.'s (WMG) strong operating performance continues to drive improvement in its credit metrics and we now expect adjusted leverage to decline and remain below 5.0x and free operating cash flow (FOCF) to debt to be sustained at around 10%.
  • Positive growth trends in the music industry, including robust growth in digital streaming, is a major driver for WMG's strong operating performance.
  • S&P Global Ratings raised its issuer credit rating on WMG to 'BB-' from 'B+'. The outlook is stable.
  • We also raised our issue-level rating on the senior secured debt to 'BB-' from 'B+'; the recovery rating on this debt remains '3'. We raised our issue-level rating on the senior unsecured notes to 'B+' from 'B'; the recovery rating on this debt remains '5'.
  • The stable outlook reflects our expectation that WMG will continue to experience high-single-digit percent revenue growth over the next 12 months mainly from digital streaming, mirroring music industry growth trends. Our outlook also reflects our expectation that deleveraging will come from EBITDA growth not voluntary debt paydowns, with adjusted leverage remaining below 5.0x on a sustained basis.
NEW YORK (S&P Global Ratings) March 14, 2019--S&P Global Ratings today took 
the rating actions listed above. The upgrade reflects our expectations that 
WMG's adjusted leverage will decline and remain below 5.0x over the next 12 
months and FOCF to debt will remain around 10%. The upgrade also reflects the 
company's consistent de-leveraging through EBITDA growth and its publicly 
stated financial policy on cash flow priorities. WMG's strong operating 
performance mirrors the music industry's expansion in general as the latter 
continues to benefit from robust growth in digital streaming that is more than 
offsetting the secular declines in physical sales and digital downloads. We 
expect the company to continue making annual dividend distributions from 
internal cash flow generation and moderate-size, debt-funded acquisitions that 
will keep leverage below 5.0x on a sustained basis.

Our assessment of WMG's business risk incorporates our view of the company's 
large and well-diversified global portfolio of recordings and compositions 
across multiple genres, its position as the third-largest global record 
company, and the continued secular trends affecting the recorded music 
industry, including threats to the growth momentum and evolving 
revenue-sharing models.

The stable outlook reflects our expectation that WMG will continue to 
experience high-single-digit revenue growth over the next 12 months mainly 
driven by digital streaming, mirroring music industry growth trends. Our 
outlook also reflects our expectation that deleveraging will come from EBITDA 
growth not voluntary debt paydowns.

We could raise our issuer credit rating on WMG if the company is able to 
reduce and maintain leverage below the mid-4.0x area on a sustained basis. An 
upgrade would also depend on WMG's ability to continue benefitting from 
secular growth trends in the music industry while maintaining or growing its 
market share. This includes successful expansion of digital streaming services 
to new and existing markets and an improved regulatory environment that 
reduces copyright infringement.


We could downgrade the company if leverage rises above 5.0x and free operating 
cash flow to debt declines below 10% on a sustained basis. This could occur if 
operating performance deteriorates leading to lower-than-expected EBITDA 
growth, driven by a slowdown or reversal in growth trends within the music 
industry or market share losses. We could also lower our rating if the company 
adopts a more aggressive financial policy stemming from large debt-funded 
dividend distributions and a tolerance for leverage above 5.0x on a sustained 
basis.