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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.
..Issuer: WMG Acquisition Corp.
$1.006 Billion Senior Secured Term Loan due 2023 --
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
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
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.
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
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.
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
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
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
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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