Warner Music Group paid down $175 million of debt in 2016, says de-levering remains a focus

By Paul Deckelman

New York, Dec. 8 – Warner Music Group Corp. “took steps to further optimize our capital structure this year,” the company’s chief financial officer said Thursday – “and we will remain opportunistic.”

Eric Levin, who also serves as executive vice president for the New York-based recorded music and music publishing company, told analysts on its conference call following the release of its results for the 2016 fiscal fourth quarter ended Sept. 30 that during the year, “we extended maturities of certain tranches of our debt, and paid down $175 million, including all of our 13¾% HoldCo notes” due 2019.

Its WMG Holdings Corp. subsidiary called $50 million of the $150 million of outstanding notes in January and then took out the remaining $100 million in June.

That was a major component in the company’s debt reduction for the year – as of Sept. 30, long-term debt stood at $2.81 billion, down 6% from the $2.98 billion of long-term debt on the balance sheet a year earlier, at the end of 2015. There was no current portion of long-term debt due in the latest period, versus $13 million a year ago.

Levin noted that “we’ve already begun efforts in fiscal ’17 with our bond offering and related re-fi in October, and term loan extension in November.”

The company, through its WMG Acquisition Corp. unit, sold €345 million of 4 1/8% senior secured notes due 2024, upsized from €340 million originally, and $250 million of 4 7/8% senior secured notes due 2024 in a two-part, regularly scheduled forward calendar offering that priced on Oct. 13, with both tranches coming to market at par.

The proceeds from that offering were used to refinance its €157 million of 6¼% senior secured notes due 2021 and $450 million of 6% senior secured notes due 2021 via a mid-October tender offer. Holders tendered and the company accepted for purchase €134.51 million of the euro notes, or 85.4% of the outstanding amount, and $362.64 million of the dollar notes, or 80.59% of the outstanding amount.

In November, WMG Acquisition entered into a $1.01 billion term loan, extending its maturity to 2023 from the previous loan’s 2020 maturity, subject, in certain circumstances, to a springing maturity inside the maturity date of some of the borrower’s other outstanding debt. It increased its loan by $27.5 million, using the extra proceeds to redeem $27.5 million of its 5 5/8% senior secured notes due 2022 at 103% of par plus accrued interest, leaving $247.5 million of the notes outstanding.

Levin said the refinancing transactions “will save us about $30 million in interest expense on a go-forward annualized basis, as we’ve lowered our blended interest rate to 4.9%, compared with 5.6% only a year ago.”

With the help of what he called “selected asset sales” totaling $45 million in cash in ’16, as well as another $42 million from real estate sales, including the sale-leaseback of its Sydney office and an office in the U.K, Warner Music Group ended the year with $359 million of cash on the balance sheet, with noting drawn against the company’s revolving credit facility.

He said that balance sheet cash was “up significantly from the $246 million in 2015. Our net debt is nearly $300 million lower than last year.”

Levin said that the company “is using our cash in a balanced way, to reinvest in business and to de-lever – yet ample cash remains on [the] balance sheet.”

He said that given this, “and based on the continued confidence of our growth, our board has decided to issue a dividend, in the amount of $54 million, which will be paid on Jan. 3.”

But he said that the company’s philosophy with respect to dividends “requires that operating cash flow is more than sufficient to serve our continued investment in our artists, our songwriters and our company. We are also committed to continued debt paydown.

“To be clear – we only plan to consider future dividends after first achieving these priorities.”

Asked during the question-and-answer portion of the conference call whether the company has a leverage target, Levin declined to put a number on it, saying only that “although we’re comfortable with where our leverage is today, we continue to focus on taking steps to de lever going forward, so at this point, our strategy is to continue to work it down, for the time being.”

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