National Amusements, the Redstone family holding company, was placed on negative credit watch by ratings agency S&P Global after shares of ViacomCBS – which NAI uses as debt collateral – skidded so low over the past three weeks that the parent was in technical default on a bank loan.

That’s a headache for NAI but also a warning sign for heavily indebted media and entertainment companies in a highly volatile market.

In NAI’s case, the debt, of about $300 million, is not huge relative to its assets. And it’s unlikely the technical breach will become an actual default, S&P said, as banks have given NAI a waiver through March 28 to resolve the situation and could agree to renegotiate the loan terms. An existing debt covenant requires the value of ViacomCBS stock provided as collateral be worth at least 1.5 times the amount of debt. But, after a recent plunge in the market, it was only worth 1.2 times.

S&P said its move follows the steep sell-off in the equity markets due to fears related to the coronavirus, which reduced ViacomCBS’ share price to less than $20 as of March 9 from over $35 on Feb. 19. The overall value of NAI’s holdings in ViacomCBS dropped from over $2.4 billion to roughly $1.4 billion.

The negative credit watch – which S&P said means there’s about a 50% chance of the credit rating being slapped down a notch – is also due to jitters at the coronavirus’ impact on 2020 theater attendance as movie releases are delayed and consumers increasingly avoid public areas. That could pressure the family-owned theater chain, also called National Amusements and run for years by Shari Redstone under the NAI umbrella. NAI’s loan covenants are also linked to maintaining a metric called EBITDA – earnings before interest, taxes, depreciation and amortization – at a certain level. S&P said the group is still in compliance with EBITDA requirements but could face increasing pressure on earnings.

“In resolving the CreditWatch listing, we will evaluate NAI’s capital structure and our projections for its operating performance in 2020 after it reaches an agreement with its lenders on how it will cure the covenant violation. We will also evaluate the amount of cushion the company will establish under both its minimum collateral and minimum EBITDA covenants,” S&P said.

“We believe the company has sufficient assets to cure its covenant violations by adding more shares to the collateral package, using cash on hand to reduce its outstanding debt, or by amending the credit agreement to provide additional headroom. It noted that NAI owns roughly 62.9 million total shares in ViacomCBS but has only included 25 million in its stock pledges to support its debt.

“In a worst-case scenario, NAI could sell shares to repay its debt and still maintain voting control at ViacomCBS, though we view this scenario as very unlikely given the recent decline in the value of these shares,” S&p said. “Overall, we believe the risk of an actual default remains low. However, our view of the company’s liquidity will be depend on the amount of covenant cushion it establishes after curing the current violation and our expectation for its operating performance in 2020.”

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