Even if Paramount Skydance manages to take over Warner Bros. Discovery against the company’s will, it faces another high hurdle: coping with the colossal $54 billion of debt it’s planning to take on.

Paramount has a temporary financing package in place for the combined company, but it hasn’t locked in a maximum rate on more permanent borrowings for the transaction. The result could be the M&A world’s version of a big-budget Hollywood fiasco, with Paramount’s expenses spiraling beyond what it planned if debt markets sour and funding costs surge.

To get the financing, Paramount is pitching itself to credit markets as an aspiring member of Corporate America’s royalty — an investment-grade borrower entitled to cheaper interest rates and underwriting fees. Paramount must deliver a long to-do list of cost cuts and efficiency savings to earn that blue-chip status.

What’s more, Paramount’s debt package is being structured to leave the company, rather than its bankers, on the hook if interest rates for the longer-term financing climb during what could be a drawn-out takeover battle that stretches into 2026. Paramount’s hostile offer is competing with a friendly one from Netflix that Warner’s board has already approved, so any further bidding could push the winning price — and Paramount’s debt — even higher.

Hung loans

Bankers have seen this movie before. The money provided by Bank of America, Citigroup and Apollo Global Management would be one of the largest debt packages for an acquisition on record, so they want to avoid a repeat of 2022 when Wall Street lenders were stuck with so-called hung loans. That’s banker lingo for acquisition debt they underwrote but were unable to sell to investors until much later, often at a huge loss, because rates and the price investors demanded for taking on the risk turned higher.

The financing offered by the trio of lenders is a bridge loan, which will come in the form of investment-grade secured debt and non-investment-grade unsecured components, denominated in dollars and euros to capture as much liquidity as possible, according to people familiar with the matter. This unusual hybrid structure is expected to offer investors more yield than is typically seen in an investment-grade deal, the people said.

Crucially, however, the long-term financing comes with no caps on the interest rate. This means there’s nothing to prevent lenders from raising the cost to Paramount if the market deteriorates, the people said, asking not to be identified because the terms haven’t been made public.

That, plus the length of time credit raters expect for the deal’s cost savings to pay off, could leave Paramount with a more expensive path to a successful merger. But with a year plus some extensions to refinance the bridge loan, the company can afford to wait for favorable market conditions, the people said, adding that multiple banks have inquired about participating.

Paramount, Netflix and the lenders declined to comment for this article. Representatives for Warner didn’t respond to messages.

Risk revival

Banks are just regaining their risk appetite as buyout momentum has started to build, prompting forecasts of a record year for M&A in 2026. This follows a lean period of event-driven financing when merger activity all but stalled in 2022, following Russia’s invasion of Ukraine, a surge in inflation and a sharp rise in interest rates.

The way it stands, funding for Paramount’s bid will be split equally by the three providers, the people said. Apollo will be financing its portion in the same capacity as a traditional bank lender — the firm will underwrite the package with plans to sell off its stake to investors, instead of via its private credit arm, the people said.

As a borrower rated on the cusp of junk, Paramount is likely to pay more for its debt than Netflix, a high-grade issuer that’s relying on a $59 billion loan.

Netflix’s bid consists of a bridge loan from Wells Fargo & Co., BNP Paribas and HSBC Holdings, with the debt eventually replaced by bonds. While Paramount’s loan will be secured by the company’s assets, Netflix’s loan is unsecured, implying that lenders didn’t demand backing by specific collateral. This is likely due to Netflix’s stronger balance sheet and credit ratings.

Credit raters

Even with that, a team of Morgan Stanley analysts said rising debt levels are a risk for Netflix investors. The streaming company, graded A by S&P Global Ratings and a notch lower by Moody’s Ratings at A3, is vulnerable to a cut to the BBB tier, the analysts wrote in a Monday note.

Paramount interim Chief Financial Officer Andrew Warren said on Monday in a conference call that a key ratio of debt to a measure of earnings will be around four times at the closing of the acquisition. The borrower is targeting an investment-grade rating within two years by cutting leverage to about two times, he said.

Credit raters at Moody’s expect debt leverage for Paramount’s deal will be much higher, about seven times earnings before interest, taxes, depreciation and amortization, after the deal closes. Unlike Paramount’s estimate, this figure doesn’t reflect any synergy benefits; Moody’s allowed that the ratio could fall afterward with the use of free cash flow and the realization of most cost savings.

Pro forma net leverage will be around 5.5 times, according to CreditSights, which expects the Paramount family rating would be downgraded to junk.

"While we think the potential for cost savings is significant, we also believe that they will take several years to realize and think that the rating agencies will be unwilling to give full credit,” analysts including Hunter Martin and Joshua Kramer wrote in a Monday note.

Still, the arrangement comes with some financial advantages for Paramount. Lenders can earn lucrative banking fees of about 2.5% on typical LBOs, but Paramount is expecting to pay a sum that’s more line with an investment-grade deal. The bankers won’t suffer, either: Even a 70-basis-point fee typical for an investment-grade deal would bring them a huge $378 million payday.