Record Labels

Warner Music Gets Upgrade From S&P on Strength of Streaming

Stephen Cooper
Guerin Blask

Stephen Cooper photographed on Jan. 25, 2017 at Warner Music Group in New York.

S&P Global upgraded Warner Music Group’s credit rating on Tuesday (July 20), citing a surging streaming music business and acquisitions of music rights that provide an immediate boost to revenue.

S&P’s report contains many of the common themes about today’s music business cited by analysts: streaming accounts for a growing majority of company revenues and offers better margins than CDs and downloads. Countries such as Japan and Germany -- the second- and fourth-largest markets in the world -- have been dominated by physical product but are moving to digital. Streaming services have an ability to tap into emerging markets where major labels have historically had little presence.

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.