Credit rating agency Fitch has cut Lionsgate’s debt rating to “negative,” from “stable,” which means further revisions are possible.

Fitch also affirmed the studio’s long-term debt issuer rating at B, even as an analyst cited the Hollywood studio facing steep content costs for its linear TV and streaming platforms and “Fitch’s uncertainty about the performance of theatrical releases in the next two years as theatre attendance is not expected to return to pre-pandemic levels.”

Fitch raised concerns over Lionsgate’s use of production loans and other debt facilities to fund its production costs, which will be repaid using cash from selling and licensing films and TV shows.  

“The elevated (debt) balance is due to upfront funding for content that was produced – but not released – during the pandemic and the heightened content investment by linear and digital distribution platforms. These trends resulted in elevated inventory and minimal cash receipts with which to paydown associated production loans,” Fitch observed.

The ratings firm adds Lionsgate is looking to box office from John Wick 4 and the Hunger Games sequel The Ballad of Songbirds and Snakes to help pay down debt, adding those tentpoles have “relatively built-in audiences and are expected to perform well.”

“Fitch believes management is committed to strengthening the balance sheet through FCF (free cash flow) deployment and expects the company to move significantly towards Fitch’s negative sensitivities over the next two years,” the rating agency added as Lionsgate post-pandemic is expected to return to positive free cash flow in fiscal 2024.

Fitch also predicts a rebound for Lionsgate as content for its streaming platforms is expected to continue driving subscriber gains, even as shorter term higher production and marketing expenses compress profit margins.

At the same time, Fitch cautioned Lionsgate has been buffeted by marketing conditions and competitive pressures impacting its industry rivals due to increased cord-cutting and the increasing dominance of streaming platforms.

“The media landscape has been impacted by increasing viewership fragmentation owing to shifting consumer preferences for on-demand and OTT (over-the-top) viewing and the expanding number of offerings from new media players. While demand for content is increasing, these changes are increasing the risk profile of premium content production as production costs rise for all players across the media ecosystem,” Fitch added.

Lionsgate is in the process of shopping separate sales of its studio division and its premium cable division of Starz. The company’s leadership is expected to share more details of those plans during its quarterly earnings call on Feb. 9.