Just a few months ago, life as a Paramount Global bondholder was pretty good.

The entertainment conglomerate - sporting an investment-grade credit rating - was the subject of increased takeover interest. That meant swaths of its bonds, trading below par thanks to rate hikes, might soon be repaid at a premium. In the meantime, creditors could clip their coupons.

Then, in February, S&P Global Ratings crashed the party: The credit grader said its outlook on Paramount had soured in light of new rating metrics for media companies. A month later, S&P slashed the rating to junk, citing a heavy debt load and weakness arising from the unstoppable march of streaming competition.

That downgrade ripped through Paramount’s debt stack, sending prices lower but also unlocking a series of other bearish possibilities for bondholders - including no premium repayment and possible subordination. In short, unusual headaches for the often staid world of investment-grade bonds.

“We were very clear there was a lot of risk on that name,” Naveen Sarma, US media and entertainment managing director at S&P said in an interview. “The credit metrics of this company are not indicative of a BBB- rated company.” Sarma said that the actions the firm took are not related to any potential transaction.

While still rated investment grade by two of the big three credit graders, a sale of Paramount only looks more likely in the wake of the S&P downgrade. The way the bond contracts are drafted, a cut to junk by even one agency before - rather than after - an acquisition probably nullifies a provision that would force a buyer to repay much of Paramount’s debt at a premium, CreditSights analysts wrote in a note earlier this month.

Paramount itself remains very much in play, with billionaire David Ellison’s Skydance studio and Shari Redstone, the effective controller of Paramount, reaching a tentative agreement to sell her stake to Ellison as well as enter a 30-day period to talk about how to combine the businesses. That hasn’t stopped Apollo Global Management Inc. from making a $26 billion offer to buy the business, which might be funded heavily with debt layered on top of the company as well as asset sales.

Activist investor Barington Capital Group is in favor of Apollo’s transaction, Bloomberg reported Friday, urging Paramount to end its talks with Ellison and engage with the private equity firm.

“While Skydance may have an exclusive negotiating window, we think a Skydance/Paramount deal is far from a sure thing,” CreditSights analysts led by Hunter Martin wrote in an April 4 note.

The stakes of an acquisition certainly aren’t small, and neither is the debt load at issue. Paramount has $13.5 billion in senior unsecured notes that have maturities over the next few decades and a lesser amount of junior hybrid debt. Paramount has “substantial capacity” to issue secured debt ahead of the legacy notes, potentially more than $8 billion, CreditSights analysts wrote in the note. This capacity might be used in a buyout.

Lining up that debt financing is what those in the industry call priming, or pushing down other investors in the repayment line. For Apollo, it would make sense economically to leave the existing low-coupon debt where it is while seeking new financing at a higher tier within the capital structure.

“They can keep this in place and it seems like they have a lot of capacity to issue the secured debt,” Martin said in an interview. “It would have a higher rating than issuing unsecured debt and it would just be cheaper because they can offer security.”

The potential problems don’t end there for bondholders. Moody’s and Fitch still rate the company’s notes as investment grade, and they remain in the high-grade index, but risk premium levels on the notes are similar to junk-rated borrowers.

A downgrade by a second firm would make the company a so-called fallen angel and it would migrate down to the high-yield index, likely spurring forced selling and, in turn, lowering prices. Paramount is likely considered a higher quality name in the junk market as opposed to a less quality investment-grade business, Sarma said, but it would still face higher borrowing costs.

“This is certainly not a death knell for the company, it can operate just as well as a high-yield company as it can as an investment grade company,” Sarma said. “Its cost of capital will just be higher.”

  - Bloomberg