Capital Markets

Viacom May Sacrifice Credit Rating

Sumner Redstone maintains that allowing the company's debt to drop two levels may add billions of dollars for repurchases or acquisitions.
Stephen TaubJanuary 13, 2005

Viacom Inc. chairman and chief executive officer Sumner Redstone is willing to sacrifice his cherished A- rating to grow the company and boost shareholder value.

At a conference for investors and securities analysts, Redstone told the audience that he may increase his debt load, which could knock down his credit rating, to repurchase stock or make acquisitions, reported Bloomberg. He maintained that allowing Viacom’s debt to drop two levels, to BBB, may add “billions” of dollars for repurchases or acquisitions. One possibility, according to the wire service, is an expansion of Viacom’s cable-networks unit, whose sales increased 17 percent in the first nine months of 2004.

“We are now scrutinizing our A- rating,” Redstone reportedly told attendees, adding that it is higher than the rating for other media companies. “By lowering our rating, we can return more to our stockholders.” Last year, Viacom’s share price fell 18 percent.

If the credit rating agencies lower Viacom’s debt rating, of course, all of the company’s outstanding debt issues will probably fall in price. “They have to ask the question of whether the long-term strategic goals are worth sacrificing over the short term by one or two credit levels,” said Standard & Poor’s analyst Heather Goodchild, according to Bloomberg. “Letting a credit rating slip often runs the risk of raising the cost of borrowing.”

On Wednesday, Moody’s announced that it may cut Viacom’s A3 rating — equivalent to Standard & Poor’s A- — and Fitch Ratings said it may cut the company A-minus senior unsecured debt rating, according to Reuters.

In October, Viacom announced that it would buy back $8 billion worth of shares. So far, it has repurchased more than $2 billion, Redstone reportedly said.

In other debt-underwriting news, Wal-Mart Stores Inc. announced that it launched a proposed offering of $1 billion of five-year notes. The lead underwriters are Lehman Brothers and Morgan Stanley.