Credit agency Moody's Investors Service on Thursday downgraded its debt ratings on Viacom following the company's Wednesday news that was cutting its dividend in half and that it plans to raise debt in the near term to boost its financial flexibility.
Lower credit ratings make it more expensive for companies to borrow money. Moody's kept its Viacom debt ratings at investment-grade levels, though, and said its ratings outlook was stable.
"Moody's recognizes Viacom's commitment to maintain investment-grade credit ratings and we believe the company's board and management team will take steps to de-lever the balance sheet and strengthen financial flexibility," Moody's wrote. It also forecast an increase in operating cash flows in fiscal year 2017, which starts next month.
Moody's added that "inability to drive operating performance to deliver stronger results and turnaround performance of its programming could put downward pressure" on the ratings. "This will be a growing concern as the company gets closer to the next affiliate negotiation cycle in coming years."
The firm had recently signaled a possible debt ratings cut, but decided to wait for updates from the company.
"Today's rating action reflects the continued weaker than anticipated rebound in the company's operating performance and cash flow contributions and our expectation for higher near-term adjusted leverage," Moody's analyst Neil Begley wrote in a report. "The reduction in dividends was anticipated and we believe is a prudent step on top of previous steps to halt share repurchases and increase investment in network programming. However, we have previously stated that we believe the added financial flexibility from the announced dividend cut will not on its own be sufficient to materially reduce gross debt."
He added: "Furthermore, the planned debt issuance will delay deleveraging and reduction in absolute debt as was previously anticipated by Moody's in its estimates."