Netflix goes big
The entertainment company is a household name – it’s also a junkrated issuer burning through cash, finds Molly Smith.
Netflix is tapping the junkbond market again to help finance its next wave of shows. The world’s largest online television network is selling
US$1.9 billion (NZ$2.7 billion) of senior bonds in its largest-ever dollar-denominated offering. That’s up from a planned US$1.5b, according to a statement on Monday.
The 10.5-year notes may yield
5.875 per cent, within the initially discussed range of 5.75 per cent to 6 per cent, according to people with knowledge of the matter, who asked not to be identified because the details are private.
Netflix’s planned sale follows a quarter in which it added 7.41 million subscribers, its strongest start to a year since going public 16 years ago.
Moody’s Investors Service upgraded the company’s credit ratings earlier this month, citing expectations that growth will continue and eventually turn its cash flows positive. In an April 13 report, Bloomberg Intelligence analyst Stephen Flynn said the upgrade may give Netflix the support to sell US$2b of bonds to boost liquidity and pay for rising programming costs.
Even with a better credit rating, Netflix is still a junk-rated issuer whose operations continue to burn through cash.
That hasn’t seemed to bother debt investors too much, who have proven willing time and time again to lend to the company as it invests in programming to fuel subscriber growth, according to Rahim Shad, a senior analyst in high-yield credit research at Invesco.
‘‘Of course there’s the massive cash burn, just ignore that for a second. The rest of the story is doing something that’s quite unique – subscriber growth and ASP growth,’’ Shad said, referring to average selling price.
‘‘Netflix is essentially in its own league.’’
A representative for Netflix didn’t return a call seeking comment.
S&P Global Ratings graded the bonds B+, four steps below investment grade. As Netflix continues to invest, free cash flow deficits should surpass US$3b in 2018, S&P said.
The proceeds of the offering will be used for general corporate purposes, which may include adding content, production and development as well as potential acquisitions, the Los Gatos, California-based company said in its statement. In this case, once sold, the bonds can’t ever be bought back by Netflix.
With a maturity of 10.5 years, the bonds are heavily exposed to further rises in interest rates, said John McClain, a portfolio manager at Diamond Hill Capital Management. An eight-year security with similar initial price talk would have been more attractive, he said.
‘‘There will be a better entry point into this,’’ possibly closer to when the 10-year Treasury nears 3.25 per cent, McClain said. ‘‘Netflix can’t control where interest-rate expectations are, but they waited until they printed a good quarter and that was the right thing to do.’’
With a stock market value of around US$140b and the bestperforming stock in the S&P 500 this year, Netflix has often touted its ‘‘thick’’ equity cushion as reason to buy its debt.
It’s historically borrowed to invest in original content and plans to continue to do so, according to a statement to shareholders last week. Debt financing is cheaper than equity, it said.
Netflix had $6.5 billion of longterm debt as of March 31, US$1.6b of which came from its largestever dollar-denominated sale in October. Its debt was 7.4 times Ebitda, or earnings before interest, tax, depreciation and amortisation, according to Moody’s, which uses adjusted figures for the 12 months ended March 31.
It should drop to ‘‘comfortably’’ under five times by the end of 2020 as Netflix continues to boost subscribers and revenue, Moody’s analyst Neil Begley said in an April 11 report.