Because of these and other factors, S&P lowered its risk assessment for WMG from fair to satisfactory and raised its credit rating from BB to BB+. BB is speculative grade, a notch below investment grade, meaning the company is “less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.”
WMG’s share price rose 4.4% to $36.85 on Tuesday, valuing the company at $21.4 billion. Some of Tuesday’s gain can be attributed to the markets’ rebound from Monday’s pessimism about the surge in COVID-19 infections: the Nasdaq and Dow each rose 1.6%. After WMG’s May 2020 IPO, its share price peaked at $39.61 on Feb. 2, 2021.
Even as music rights acquisitions remain a hot market with increased competition and companies paying higher multiples in their deals, S&P still expects WMG to use most of its discretionary cash flow on acquisitions. The agency adds that WMG spent about $370 million on music rights in the first half of 2021 and will likely spend even more by using debt and will maintain an adjusted leverage ratio -- debt to EBITDA (earnings before interest, taxes, depreciation and amortization) -- of 3.3 to 3.5 in 2021 and 3.1 to 3.3 in 2022.
S&P’s “base-case” scenario is as follows:
- Music label industry will expand faster than global gross domestic product.
- WMG revenue growth “in the mid-teens percentage area in 2021” and “high-single digital percent area in 2022.”
- Improves margins due to increased streaming royalties, cost-reduction efforts and greater “fixed-cost leverage.”
- Discretionary cash flow (after $250 million of annual dividends) of about $320 to $370 million in 2021 and $400 to $450 million in 2022. WMG will spend all of its discretionary cash flow -- and maybe more -- on acquisitions over the next few years.