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Rating Action:

Moody's rates Warner Music's WMG Acquisition Corp. senior secured term loan Ba3; outlook stable

25 Oct 2016

Approximately $1.0 billion of debt rated

New York, October 25, 2016 -- Moody's Investors Service ("Moody's") has assigned a Ba3 rating to WMG Acquisition Corp.'s outstanding senior secured term loan following the recently proposed amendment to the existing credit agreement to extend the maturity to November 1, 2023 from July 1, 2020 and increase the size by $27.5 million to $1.006 billion from $978.5 million. Proceeds from the upsize will be used to prepay $27.5 million of the $275 million 5.625% senior secured notes due 2022. The rating outlook is stable.

Rating Assigned:

..Issuer: WMG Acquisition Corp.

$1.006 Billion Senior Secured Term Loan due 2023 -- Ba3 (LGD3)

WMG Acquisition Corp. is a wholly-owned subsidiary of WMG Holdings Corp., which in turn is a wholly-owned subsidiary of Warner Music Group Corp. ("WMG" or the "company"). 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.

RATINGS RATIONALE

Moody's views the transaction favorably due to the extension of the term loan's maturity structure and modest improvement in WMG's weighted average interest expense. The senior secured credit facilities together with the senior secured notes share a first priority perfected lien on substantially all domestic property and assets of WMG Acquisition Corp. and WMG Holdings Corp. These debt instruments are guaranteed by the company's wholly-owned domestic subsidiaries and rated Ba3, one notch above WMG Holdings Corp.'s B1 Corporate Family Rating (CFR), reflecting the benefits of the collateral package and their senior position in the debt structure.

WMG Holdings Corp.'s B1 CFR reflects Moody's expectation that the parent, WMG, will operate with financial leverage, as measured by total debt to EBITDA, in the 5-5.75x range (including Moody's standard adjustments) over the rating horizon. We believe WMG will experience further deleveraging from the current 5.7x (Moody's adjusted, as of June 30, 2016) driven by EBITDA growth as a result of lower costs associated with online music subscription and advertising-supported streaming revenue, which is now its largest and fastest growing revenue source, underpenetrated markets worldwide for paid music streaming consumption and rising demand for WMG's music content. The global recorded music industry continues to transition from physical to digital music platforms, download to streaming services and PC to mobile devices. Following several years of decline, the industry managed to grow 3.2% in 2015 as digital formats expanded internationally, surpassing physical for the first time and comprising 45% of industry revenue.

The B1 CFR is supported by WMG's position as the world's third largest recorded music industry player with an extensive music library and publishing assets, which drive recurring revenue streams. Only a small percentage of WMG's annual revenue depends on recording artists and songwriters without an established track record, while the bulk of its revenue is generated by proven artists or from its catalog (defined as albums older than 18 months) and thus isolated from the revenue volatility associated with new releases from new artists. Ratings also recognize the opportunities to grow revenue through the proliferation of online music streaming services, and anticipate the higher margin faster-growth digital revenue will lead to market share gains in the recorded music segment.

Although the recorded music industry experienced growth last year, the B1 CFR embeds the industry's lack of sustainable revenue growth over the past two decades. The rating reflects the challenges related to strategies that major record labels are pursuing to adapt to the shift in demand for music content delivery to various digital platforms as well as certain regulatory restraints that preclude holders of music copyrights from maximizing royalties. It also captures the increasing disparity between the hyper-growth of ad-supported music streaming consumption relative to the slower growth revenue generated by the same streams, which means WMG's artists, songwriters and rights holders are not yet fully monetizing value from this sub-segment. Digital piracy and illegal online peer-to-peer file sharing continue to negatively impact industry revenue, however less so than in the past given the proliferation of legal low-cost and free ad-supported alternatives for accessing premium music content. The B1 rating incorporates the seasonal and cyclical nature of recorded music revenue (nearly 85% of WMG's revenue) and low visibility into the ultimate results of upcoming release schedules. We believe WMG will pursue external growth through small tuck-in acquisitions funded with excess cash flow and the potential sale of non-core assets. We expect the company to maintain a good liquidity profile over the next 12-15 months.

Rating Outlook

The stable rating outlook reflects our 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. We expect WMG to operate with leverage as measured by total debt to EBITDA in the 5-5.75x range (Moody's adjusted) and anticipate EBITDA growth to be driven by improved margins as a result of robust streaming revenue growth, value of its music content, realized synergies, solid returns on artist investments, marketing and branding, as well as enhancement of the company's analytics talent.

What Could Change the Rating -- Up

Ratings could be upgraded if there is evidence of sustained growth in the recorded music industry and WMG exhibits EBITDA margin expansion as well as realization of lower earnings volatility and higher returns on investments. Assurances that management will maintain disciplined operating strategies for long-term growth, exhibit prudent financial policies and target credit metrics consistent with a higher rating resulting in total debt to EBITDA leverage sustained comfortably below 4.5x (Moody's adjusted) and free cash flow to adjusted debt in the mid-to-high single digit range could also lead to an upgrade. Finally, for an upgrade to be considered, Moody's would need clarity from the equity sponsor with respect to the financial policy track record for each of its portfolio company holdings as well as the long-term investment philosophy and exit strategy for WMG.

What Could Change the Rating -- Down

Ratings could be downgraded if debt-financed acquisitions, competitive pressures or increased artist and repertoire (A&R) investments negatively impact revenue or EBITDA resulting in total debt to EBITDA leverage sustained above 6x (Moody's adjusted), or if heightened capital spending or financial sponsor related actions result in negative free cash flow.

Please see the credit opinion on www.moodys.com for additional information on WMG Holdings Corp..

The principal methodology used in this rating was "Business and Consumer Service Industry" published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

With headquarters in New York, NY, WMG Holdings Corp. is a wholly-owned subsidiary of Warner Music Group Corp., a leading music content provider operating domestically and overseas. Revenue totaled approximately $3.2 billion for the twelve months ended June 30, 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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