S&P affirms Discovery at BBB-

S&P affirmed all of its ratings on Discovery Inc., including its BBB- issuer credit rating and issue-level ratings, as well as the A-3 short-term and commercial paper ratings.

The outlook is stable.

The company announced it is merging with AT&T Inc.'s Warner Media LLC, which is being spun off from AT&T in a Reverse Morris Trust-structured transaction. WarnerMedia would then become a subsidiary of Discovery. The transaction is expected to close in the first half of 2022.

The stable outlook balances the beliefs that the new company could eventually be stronger than legacy Discovery and that Discovery management will likely face many challenges in integrating the two companies and then executing on its strategy.

Leverage will start out high for the rating, but it should improve quickly in line with company's tighter 2.5x-3x leverage policy. S&P estimates that adjusted leverage, pro forma for the transaction, will initially exceed 5x.

However, the agency expects Discovery will reduce leverage to about 3.1x by 2023, less than two years after the transaction closes, leaving 0.4x cushion against our 3.5x downgrade threshold at the BBB- rating.

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