Media & Entertainment Sector Corporate Defaults Rise
Challenging economic conditions continue to put immense pressure on both global and U.S.-based companies, causing cash flow and liquidity problems. This has prompted corporate defaults to spike, with defaults in the U.S. more than doubling over the last year, according to S&P Global Ratings.
And the media and entertainment sector has been feeling the pain. The sector saw 16 corporate defaults in May, bringing the global total to 71 in 2023. Compare that with the sector’s year-to-date five-year average of 53 and 10-year average of 50.
The media and entertainment sector accounts for 23% of global defaults so far in 2023, which is the highest share compared with other sectors, according to S&P Global Ratings. That’s because of the higher interest rate environment, ongoing recovery efforts following the COVID-19 pandemic and other secular pressures.
About 75% of total defaults from the media and entertainment sector have been in the U.S. Among some of the most notable media companies to default this year are Diamond Sports Group, an independent subsidiary of Sinclair Broadcast Group.
Diamond Sports Group defaulted on Feb. 15 due to missed interest payments. At the time, the company had roughly $425 million cash on hand but owed lenders about $8 billion to $9 billion. The broadcaster was a big bet by parent company Sinclair on the regional sports appetite, and most of the debt was acquired when Sinclair bought 21 regional sports networks from Disney at $10.6 billion.
That deal was made in 2019, and at the time Sinclair CEO Chris Ripley said it would help the company focus on providing stronger premium sport programming. The timing couldn’t have been worse. Cord-cutting was already an issue but has only accelerated since then. Even as sports remains a bright spot within pay TV, it still isn’t immune to the shift away from cable.
Ultimately, Diamond Sports was subject to hundreds of millions of dollars in annual debt payments, and in February it missed a $140 million interest payment to its bondholders.
Economic uncertainty and worsening operating conditions are expected, as Fed Chair Jerome Powell said the central bank plans to raise interest rates further this year after a short pause in June. As a result, the media and entertainment sector defaults will likely increase.
According to S&P Global Ratings data, the media and entertainment sector currently leads the “weakest links tally,” which is the number of issuers rated B- and lower with a negative outlook or on CreditWatch negative. Weakest links are about eight times more likely to default than other speculative-grade bond issuers, S&P said.
Speculative grade bonds are issued by companies who typically have a lower level of credit quality (rating lower than BBB-) compared with investment-grade companies, which are more highly rated (BBB- or higher).
It's worth noting that while credit ratings by S&P and others are taken into consideration by investors, they do not determine a company’s investment worthiness — meaning credit ratings do not measure asset value but instead just determine credit quality.
Coming out of the pandemic, media and entertainment companies saw their credit quality weaken. And many companies haven’t been able to fully recover from those downgrades. Given the rise in credit downgrades, there is far less room for underperformance. As has been the case over the past year or so, media companies need to remain hyperfocused on maintaining healthy balance sheets with strong cash flow and reduced debt.
