Paramount’s $52B debt sale highlights rising cost of corporate borrowing

Paramount (PSKY) completed a record $52 billion debt offering to finance its acquisition of Warner Bros. Discovery (WBD), locking in funding despite a sharp rise in interest rates that has made borrowing considerably more expensive for U.S. companies, The Wall Street Journal reported Sunday.

The sale, the largest single-day bond offering by a public company, came as Paramount (PSKY) faced a Sept. 30 deadline to complete the Warner Bros. (WBD) transaction without penalty. The company sold a combination of investment-grade and junk-rated bonds with maturities stretching from 2028 to 2066 and interest rates reaching as high as 9.1%.

The timing proved costly. Paramount (PSKY) could have saved roughly $400 million a year in interest if it had issued the debt several months earlier, when Treasury yields were about one percentage point lower, according to people familiar with the financing cited by the Journal. The company had hedged some of its exposure to rising rates through derivatives.

Paramount (PSKY) originally expected to raise the money around midyear, but a lawsuit by several states seeking to block the Warner Bros. merger delayed the transaction. By the time a settlement cleared the way for the acquisition, Treasury yields had surged.

The financing demonstrates both the strength and the growing expense of U.S. credit markets. Paramount (PSKY) was able to raise an extraordinary amount of capital, but the higher interest burden could constrain cash flow and increase pressure on management to deliver cost savings and stronger earnings from the Warner Bros. (WBD) combination. More broadly, rising borrowing costs pose a particular challenge for heavily indebted and capital-intensive companies.

Investor demand for the offering was nevertheless substantial. Orders were said to reach about $150 billion, nearly three times the amount of debt available. Apollo Global Management (APO), Pimco and hundreds of other institutional investors participated in the financing, which also included floating-rate loans.

Corporate credit conditions remain relatively healthy because the additional yield investors demand above Treasury securities is still modest. The bigger problem is the underlying rise in government bond yields (US10Y), which is lifting financing costs even for financially strong borrowers. Heavy borrowing associated with artificial intelligence infrastructure is adding further competition for capital.

Paramount's (PSKY) new securities encountered some turbulence after issuance. One of its junk-rated bonds initially traded around 96 cents on the dollar before recovering some ground, illustrating how quickly higher rates and Treasury-market volatility can affect newly issued corporate debt.