You would think the increasingly competitive landscape for streaming platforms would dim the appeal of Netflix to bond investors but then again Stranger Things have happened.
The streaming platform is under greater pressure to deliver audience growth figures following the launch of Disney+ recently, as well as sustained challenges to the company from rivals such as Amazon Prime and Hulu.
The market for content is becoming increasingly congested as a result, with Netflix issuing guidance that it would spend around $15 billion on content this year with a free cash flow deficit of $3.5 billion, as reported by Variety.
Netflix’s latest offering to credit investors — a $2.24 billion bond issue was split into a $900 million dollar deal and a €1.2 billion ($1.34 billion) tranche both due in 2029— attracted $6 billion in investor demand, highlighting the company’s appeal, according to Bloomberg.
It takes Netflix’s total debt to $12.3 billion with the company making no plans to become cash flow positive until 2021 as it continues to splurge on new content.
The deal was priced at par but is now trading up nine cents on the dollar, meaning that its actual yield has been depressed given the increased bond price.
The debt pile indicates that Netflix’s leverage — the ratio of debt to earnings a company has — is now at 6 times, which would mark a record for the company’s gross leverage, according to CreditSights, whose analysts are skeptical of Netflix’s recent deal. Having high leverage means a company has more debt than assets available to pay off debts at a given time and has been a growing concern for the market as leveraged debt levels have boomed in recent years.
Netflix is a darling of debt markets. Creditors have been piling in to lend to the junk rated company, rated Ba3/BB- (sub-investment grade).
It’s a continuation of the high yield (read: more risky) market’s rise in prominence in recent years. Yield-hungry investors are searching for fresh options amid low interest rate offerings from global central banks making traditional options like US Treasuries less attractive.
Importantly, Netflix’s repeated issuance — it took out a similar $2 billion bond last October — makes it a highly liquid and attractive option, says John McClain, a portfolio manager at Diamond Hill Capital Management, a US investment firm that manages fixed-income funds.
“The current position for Netflix is great, the market has been starved for supply, and the Fed is effectively on a permanent pause,” McClain said in an interview with Business Insider. “It makes them attractive to this market, they offer a compelling product and have been very successful compared with other unicorns.”
The high-yield market had been lucrative to tech stocks because financing has tended to be cheaper and more effective than selling more stock with other companies such as Tesla, SpaceX and WeWork taking a similar route in recent years.
There are doubters.
“We are concerned a misstep in its growth trajectory, while cash burn continues to mount, could result in material downside for Netflix bonds,” CreditSights analysts Mary Pollock and Jay Mayers wrote in a note. “The impact of new competitors in the space is real.”
But, McClain said, investors have been falling overs themselves to lend to companies like Netflix for years and would probably do the same again if they came back to market later this year to help fund their cash shortfall.
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