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Rating Action:

Moody's assigns Ba3 rating to WMG Acquisition Corp.'s new senior secured euro notes

05 Aug 2021

Approximately €445 million of new debt rated

New York, August 05, 2021 -- Moody's Investors Service ("Moody's") assigned a Ba3 rating to WMG Acquisition Corp.'s ("Acquisition Corp.") proposed senior secured euro-denominated 10-year notes. The Ba3 Corporate Family Rating (CFR) and stable outlook remain unchanged.

Following is a summary of today's rating action:

Assignments:

..Issuer: WMG Acquisition Corp.

€445 Million ($531 Million US dollar equivalent) Gtd Senior Secured Regular Bond/Debenture due 2031, Assigned Ba3 (LGD3)

The assigned rating is subject to review of final documentation and no material change in the size, terms and conditions of the transaction as advised to Moody's. Acquisition Corp. is an indirect wholly-owned subsidiary of Warner Music Group Corp. ("WMG" or the "company"), which is the ultimate parent and financial reporting entity that produces consolidating financial statements. The new senior secured term euro-denominated notes will be pari passu with Acquisition Corp.'s existing senior secured (unrated) revolving credit facility (RCF), senior secured term loan (governed by a separate credit agreement than the RCF) and senior secured notes. The new euro notes will be guaranteed on a senior secured basis by Acquisition Corp.'s wholly-owned domestic restricted subsidiaries (same guarantors as the credit facilities) and secured by a first priority perfected lien on substantially all domestic property and assets of Acquisition Corp., WMG Holdings Corp. and each subsidiary guarantor.

RATINGS RATIONALE

The transaction is leverage neutral since Moody's expects Acquisition Corp. to use the net proceeds plus cash-on-hand to fully repay the existing €445 Million 3.625% Senior Secured Euro Notes due 2026 (the "2026 Notes") together with the call premium and unpaid interest associated with the 2026 Notes. Moody's views the transaction favorably given the extension of the debt maturity and expected lower coupon. Upon full extinguishment of the 2026 Notes, Moody's will withdraw the rating.

WMG Acquisition Corp.'s Ba3 CFR benefits from: (i) WMG's position as the world's third largest music company with steady market shares bolstered by its extensive recorded music and music publishing assets, which drive recurring revenue streams that remained fairly resilient during the COVID-19 pandemic; (ii) the global music industry's long-term secular growth fueled by resurgent demand to license WMG's music content, driven chiefly by strong consumer adoption of paid subscription streaming services, social media apps and emerging digital platforms that Moody's expect to continue, especially in overseas markets; (iii) WMG's business model in which only a small percentage of revenue depends on recording artists and songwriters without an established track record, while the bulk of revenue is generated by proven artists or its music library; (iv) investment in new artist and talent development to institutionalize a pipeline of recurring hit songs to help moderate recorded music volatility; (v) an attractive music library with good geographic diversity and monetization characteristics; and (vi) an improving financial leverage profile approaching the 3.5x- 4x area (as calculated and adjusted by Moody's).

Factors that weigh on the rating include: (i) WMG's historically seasonal recorded music revenue (about 85% of total revenue), albeit increasingly less cyclical in large digital streaming markets, coupled with low visibility into results of upcoming release schedules; and (ii) softness in certain revenue streams affected by the pandemic (i.e., artist services and expanded rights, general licensing, performance and mechanical). Potential headwinds include the slow transition from physical to digital among a few large countries, secular declines in physical media and digital downloads, and the music industry's revenue challenges that prevent full maximization of content value from user-uploaded videos to WMG's songwriters and rights holders. Recent regulatory developments, however, are expected to help expand royalty payments to rights holders. There is also the potential for increasing competition from Universal Music Group, which is planning to spin out of parent Vivendi SA later this year.

The stable outlook reflects Moody's view that WMG's license revenue model, driven by digital revenue growth, and operating profitability will remain fairly resilient generate positive free cash flow. The outlook considers Moody's expectation for continued improvement in recorded music industry fundamentals combined with WMG's position as the world's third largest music content provider with global diversification, an enhanced recorded music repertoire and well-established music publishing assets with long-tail annuity-like cash flows. The company's scale and market position combined with revenue diversification across songs, music genre and license type, will help to offset and cushion the impact from pandemic-related softness in performance, mechanical, general licensing ad-supported, and artists services and expanded rights revenue (as a result of tour postponements and reduced merchandising and sponsorship revenue).

Moody's expects that WMG will maintain good liquidity supported by cash levels of at least $150 million (cash balances totaled $442 million at 30 June 2021), access to the unrated $300 million revolving credit facility maturing April 2025 (currently undrawn) and free cash flow generation in the range of roughly $250-$350 million over the next twelve months. Moody's free cash flow projection assumes no music publishing or catalogue asset purchases.

A social impact that Moody's considers in WMG's rating is consumers' increasing shift to on-demand music streaming subscription services (access) from music purchases (ownership). Given that WMG owns the copyrights to highly desirable music content, the streaming providers and emerging digital platforms have no other choice but to license the company's content for their platforms to remain competitive and ensure listeners have access to their favorite songs. This will continue to benefit WMG and support solid revenue and EBITDA growth fundamentals over the next several years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Ratings could be upgraded if WMG exhibits sustained revenue growth in the recorded music business, EBITDA margin expansion, continued decrease in earnings volatility and higher returns on investments. Upward pressure on ratings could also occur if Moody's expects total debt to EBITDA will be sustained below 3.5x (Moody's adjusted) with free cash flow to debt of at least 7.5% (Moody's adjusted).

Ratings could be downgraded if competitive or pricing pressures lead to a decline in revenue or higher operating expenses (e.g., increased artist and repertoire (A&R) investments), EBITDA margin contraction or sizable debt-financed acquisitions increases debt to EBITDA to above 4.5x (Moody's adjusted) for an extended period of time. There would also be downward pressure on ratings if EBITDA or liquidity were to weaken resulting in free cash flow to debt sustained below 5% (Moody's adjusted).

With headquarters in New York, NY, WMG Acquisition Corp. is an indirect wholly-owned subsidiary of Warner Music Group Corp., a publicly traded leading music content provider operating domestically and overseas in more than 70 countries. WMG has a library of over 1 million copyrights from more than 80,000 songwriters and composers across a diverse range of genres. Access Industries, Inc., a privately-held industrial group, acquired WMG for approximately $3.3 billion in July 2011. Revenue totaled just under $5.1 billion for the twelve months ended 30 June 2021.

The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gregory A. Fraser, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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