Netflix to tap junk bonds for shows

Netflix Inc. said it plans to sell $1.6 billion of bonds, its largest-ever dollar-denominated sale, to help it develop and produce new hit series like Stranger Things.

The 10.5-year junk-rated notes, which can’t be bought back, may yield between 4.75 percent and 5 percent, according to a person with knowledge of the matter, who asked not to be identified because the details are private.

The world’s largest online television service is burning through cash as it invests in programming to fuel subscriber growth. Investors have clamored for the company’s debt as extremely low interest rates on government bonds prompt them to buy riskier and higher-yielding assets. That allowed the home of Master of None and House of Cards to increase the size of a euro-denominated offering in April.

It seems to be working. Netflix added around 5.3 million customers in the three month period through September — its best quarter since the end of last year. The Los Gatos, Calif.-based company has doubled its debt to almost $5 billion over the past 18 months, and may sell another $3 billion of bonds by this time next year, according to a report from last week from Bloomberg Intelligence, Bloomberg’s research arm

“We don’t expect that this will be the last time Netflix will tap the debt markets in the near-term to fuel its cash-burning growth,” CreditSights analysts Lindsay Pacia Gibbons and Jay Mayers said in a report Monday. “We think there are enough fundamental credit investors that are wary of Netflix’s leverage and free cash flow burn that Netflix will likely have to give investors some type of concession.”

Moody’s Investors Service assigned the debt a rating of B1, four steps below investment grade, with a stable outlook.

Investors were similarly willing to buy Tesla Inc.’s debut bond sale in August, which was upsized to meet demand. John McClain, a portfolio manager who helps oversee $21 billion of assets at Diamond Hill Investment Group, said he prefers Netflix to Tesla because it’s a more proven concept with a better balance sheet, but won’t buy this issue as Netflix’s debt doesn’t sufficiently compensate for interest rate risk.