Netflix Inc. announced its third tap of debt markets in a year on Oct. 22, aiming to raise another $2 billion as the streaming video pioneer invests heavily in original shows and acquiring content to fend off intensifying competition.
The move, which the company said was aimed at funding for a broad spread of activities, spurred falls in both the prices of its bonds and its shares as investors worried about the growing costs of its huge planned investments in years to come.
Netflix said in April it planned to raise $1.5 billion in debt, after raising $1.6 billion in October last year, bringing the total in the past year to about $5 billion, just half of the estimated $9 billion it will spend on content in 2018.
Bumper results last week, driven by gains in international subscribers, again eased concerns that the leader in global streaming is running out of space to expand in developed markets where it can target a mass audience at profitable prices.
But while Netflix still has huge potential in emerging markets like India, some brokerages have begun to draw attention to the overall high cost it is paying as an enterprise to gain more users.
Prices on Netflix’s existing debt dropped across the board on Oct. 22, with the biggest drops in a bond coming due in 2026, which fell by about 3 cents to trade at 91.5 cents on the dollar. Its eurobond coming due in 2028 also dropped nearly 3 cents to 91.95 cents on the dollar.
Bearish bets against Netflix’s existing $8.4 billion of junk-rated bonds have more than tripled this year to an all-time high of $347 million, Reuters reported last week.
The company has consistently said that it expects to fund content acquisition through the high-yield bond market but the cost of that is steadily rising along with U.S. and European interest rates.
“This is further proof of Netflix need for capital to fund short-term operations and content capex,” Richard Miller, founder and managing partner at Gullane Capital, which is short the equity.
“It shows they are further than ever from being free cash flow positive.”
Some 27 of the 43 brokerage analysts that cover Netflix continue to back the stock with “buy” ratings, compared to just three with “sell” ratings, although its shares have slipped back since last week’s results.
That shows most have now given it the benefit of the doubt on a shortfall in subscriber numbers in the second quarter, and the company has also cut its projection for negative cash flow to closer to $3 billion from a previously projected minus $4 billion.
S&P rated the proposed debt issue at ‘BB-‘ and ‘3’ recovery rating. The recovery rating indicates a meaningful recovery of about 65 percent of principal in the event of a payment default.
It said the rating reflected the company’s improving underlying profit margins over the last 12 months, driven in part by price increases and subscriber growth.
“These factors demonstrate the strength of the company’s business model and its ability to expand globally, increase margins, and manage its increasing debt burden,” S&P said.
The new debt will be in the form of senior notes denominated in U.S. dollars and euros—securities which the company must repay before any unsecured debt in the event of a bankruptcy.
Netflix’s total debt stood at $11.83 billion as of Sept.30.
The company is now trading at nearly 115 times forward earnings, making it the second-costliest of the FAANG group of major tech bets after Amazon.com Inc.’s 160 times, according to Refinitiv data.
By Kate Duguid & Sonam Rai