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Rating Action:

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

16 Jun 2020

Approximately US$900 million of new debt rated

New York, June 16, 2020 -- Moody's Investors Service ("Moody's") assigned Ba3 ratings to WMG Acquisition Corp.'s ("Acquisition Corp.") proposed senior secured notes offering totaling US$900 million in aggregate. The stable outlook remains unchanged.

Following is a summary of today's rating actions:

Assignment:

..Issuer: WMG Acquisition Corp.

Senior Secured Euro Notes due 2028, Assigned Ba3 (LGD3)

Senior Secured Notes due 2030, Assigned Ba3 (LGD3)

The assigned ratings are 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 notes, which will consist of a euro tranche and dollar tranche, will be pari passu with Acquisition Corp.'s existing senior secured notes and senior secured credit facilities, and guaranteed on a senior secured basis by WMG and its wholly-owned domestic restricted subsidiaries that guarantee the existing senior secured debt obligations.

RATINGS RATIONALE

The transaction is leverage neutral since Moody's expects Acquisition Corp. to use the net offering proceeds plus cash to repay the $300 Million 5% Senior Secured Notes due August 2023, €311 Million 4.125% Senior Secured Notes due November 2024 and $220 Million 4.875% Senior Secured Notes due November 2024 via redemption notices and a tender offer for the 5% Notes, plus the associated premiums, fees, expenses and accrued and unpaid interest. Moody's views the transaction favorably given the extension of the debt maturities and expected lower annual interest expense. Upon full extinguishment of the three notes, Moody's will withdraw their ratings.

Acquisition Corp.'s Ba3 Corporate Family Rating (CFR) is forward looking and supported by the parent's, Warner Music Group Corp., resilient business model driven by digital revenue, which accounts for approximately 60% of total revenue. Moody's expects WMG will experience 7%-9% average annual digital revenue growth driven by continued strong secular adoption of paid digital music streaming services by consumers, especially in underpenetrated overseas markets. As a result of the continuing shift to streaming platforms combined with its attractive and extensive music catalog, WMG has demonstrated an ability to more than offset secular declines in digital downloads and physical media.

The rating is further supported by Moody's expectation that the economic impact arising from the novel coronavirus (a.k.a. COVID-19) pandemic and related economic recession on WMG's profitability will be manageable given its license-based revenue model, in which the company licenses its music content to the leading digital streaming platforms via 1-3 year contracts. The US music streaming industry experienced low to mid-single declines for three consecutive weeks during the early phase of the nationwide shutdown in late-March and early April. Since then, it has rebounded and realized weekly growth as streaming platforms offered new analytics to engage with fans via targeted online marketing strategies, and artists shifted to live streaming events and participated in increased collaboration with media organizations and social media platforms to connect with listeners during stay-at-home measures.

WMG recently completed an IPO of just under 14% of its common shares, which raised $1.9 billion from selling shareholders and valued the company's equity at roughly $12.8 billion compared to around $6.4 billion pre-IPO. While WMG will continue to be a controlled company (Access Industries is the majority shareholder), the public listing gives it access to an additional source of capital. Moody's views the IPO positively because: (i) WMG will no longer rely exclusively on the debt or private capital markets for investment and growth opportunities; (ii) the market value of its shares provides a substantial equity cushion for debt investors; and (iii) corporate governance will likely improve given the expected accountability to public shareowners.

At LTM 31 March 2020, WMG's total debt to EBITDA was 4.5x (as calculated by Moody's), which excludes the following one-time non-recurring costs incurred in the March quarter: (i) $164 million of non-cash stock based variable compensation paid to senior management resulting from WMG's increased equity valuation related to the proposed IPO; (ii) $4 million of legal and consulting costs related to the IPO; and (iii) $3 million of bad debt provisions associated with COVID-19 supply chain disruptions of physical media deliveries. While Moody's typically includes stock-based compensation expense in its adjusted EBITDA calculations, in this instance it was excluded due to the substantial step up in WMG's equity value arising from the anticipated IPO. The variable compensation plan was subsequently amended and going forward will be settled in equity rather than cash. Moody's projects WMG will improve financial leverage and operate with total debt to EBITDA in the 4x area (as calculated by Moody's, excluding one-time costs) by the end of fiscal 2021 (ending 30 September), buoyed by EBITDA growth and adjusted EBITDA margins improving to the upper end of the 16%-20% range (as calculated by Moody's, excluding one-time costs). The company will benefit from extending into new markets for licensing music content, expanding global scale and improving operating efficiencies.

The Ba3 rating is bolstered by WMG's position as the world's third largest music industry player. WMG is experiencing share gains supported by an extensive recorded music library and music publishing assets, which drive recurring revenue streams. The company benefits from the music industry's fifth consecutive year of growth in 2019 as listeners globally increasingly subscribe to on-demand music streaming services and streaming platforms grow their demand to license WMG's music content. The company's business model, in which the bulk of revenue is generated by proven artists or its music catalog (less volatile) combined with ongoing investments in new recording artist and songwriter development to institutionalize a pipeline of recurring hit songs, helps moderate recorded music volatility. WMG maintains an attractive music catalog, with over 1.4 million copyrights from more than 80,000 songwriters and composers, and good geographic diversity and monetization characteristics.

The rating is constrained by WMG's historically variable and seasonal recorded music revenue (about 85% of revenue), albeit increasingly less cyclical in large digital streaming markets, coupled with low visibility into results of upcoming release schedules as well as anticipated deceleration and/or declines in certain revenue segments (i.e., physical media and digital downloads). Potential headwinds include the slow transition from physical to digital among a few large countries 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.

Moody's expects that WMG will maintain good liquidity supported by cash levels of at least $150 million (cash balances totaled $484 million at 31 March 2020), access to the unrated $300 million revolving credit facility maturing April 2025 (currently undrawn) and free cash flow generation of $150-$200 million over the next 12 months.

The stable outlook reflects Moody's view that WMG's digital license revenue model and operating profitability will remain fairly resilient during the ensuing economic recession and 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 and an enhanced recorded music repertoire. The company's scale and market position will help offset and cushion the impact from declines in physical, ad-supported, artists services and expanded rights revenue as a result of tour postponements and reduced merchandising and sponsorship revenue. Potentially higher leverage, rising to 5x (Moody's adjusted, excluding one-time costs) due to moderating EBITDA in fiscal 2020 and then declining to around 4x in fiscal 2021, is also factored in the stable outlook. Moody's projects a decline in economic activity in the wake of the coronavirus outbreak, with G-20 countries' GDP growth contracting 4% in 2020, followed by a 4.8% rebound next year. Moody's projects EBITDA growth in fiscal 2021 to be driven by improved margins as a result of robust streaming revenue growth, increasing value of WMG's music content, realization of synergies and solid returns from: (i) investments in artists and marketing, branding and merchandising; (ii) enhancements to the company's IT systems infrastructure and analytics; and (iii) declines in lower margin physical media.

ESG CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The recorded music and music publishing sectors have been some of the sectors affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in WMG's credit profile, including its exposure to the global economy, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and WMG remains somewhat vulnerable to the outbreak's continuing spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

A social impact that Moody's considers in WMG's credit profile is consumers' increasing usage of on-demand music streaming services. Given that WMG is one of a handful of leading providers of highly desirable music content, the streaming providers have no other choice but to license WMG'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 RATINGS

A ratings upgrade is unlikely over the near-term, however over time an upgrade could occur 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 a an indirect wholly-owned subsidiary of Warner Music Group Corp., a leading music content provider operating domestically and overseas in more than 70 countries. WMG's current catalog includes 13 of the top 50 best-selling albums of all time in the US and a library of over 1.4 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 $4.5 billion for the twelve months ended 31 March 2020.

The principal methodology used in these ratings 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

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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