Today’s price action in various media and streaming names has been notable. However, Paramount Global (NASDAQ:PARA) is among the key movers this afternoon, with PARA stock moving around 5% lower.
This move follows a warning issued by ratings agency S&P Global on Paramount. The ratings agency put PARA stock on a negative credit watch, suggesting that Paramount Global’s credit rating could be moved from BBB+ to BBB- if fundamentals continue to deteriorate. S&P has noted that ongoing declines in cable TV viewership and increased competition in the streaming business have led to this warning.
It’s worth noting that, at least as of right now, nothing has been done officially in regard to the company’s credit rating. There’s always the potential for Paramount to see an improvement in its core business and a potential credit upgrade. But given the size of the company’s debt load, this announcement is certainly not a positive.
Let’s dive into why the market is reacting so negatively to this news today.
PARA Stock Sinks on News of Potential Credit Rating Downgrade
Paramount Global’s core media business is impressive and the inroads the company has made into streaming are noteworthy. Unfortunately, however, years of acquisitions and the capital-intensive nature of content development for streaming platforms means a growing debt pile is likely in the years to come. Indeed, for any company in the media business, managing debt ratios is about as important as any other aspect of the business.
Thus, credit ratings matter a great deal to companies like Paramount with billions of dollars in debt to roll over and issue on a frequent basis. A move toward BBB- (the lowest rating for investment grade debt there is) could signal Paramount may be headed into junk bond territory next. That would imply much greater borrowing costs, further hampering the business and potentially leading to a downward spiral the firm may have trouble getting out of.
Again, it’s probably not the time for existing PARA stock investors to get too far ahead of themselves. Austerity may be coming and we’re already seeing many major players cut back on such expenses. However, this credit rating warning is a big deal and investors are treating it as such. Personally, Paramount Global is not on my watch list right now due to these credit concerns, which have now been amplified.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
