Netflix's growing debt worries investors as it plans a $ 2 billion bond issue

Netflix Inc. announced on Monday that it would operate the debt markets for the second time this year, with the goal of raising an additional $ 2 billion, the pioneer of video streaming investing heavily in production. original programming and in the acquisition of content to counter competition.

This operation, which aimed to finance many activities, including the payment of new content, led to a fall in the prices of its bonds and its shares, investors worried about the rising costs of its huge investments planned in the years. to come up. .

Netflix Chief Executive Reed Hastings explained California's Los Gatos project to finance the acquisition of content by borrowing money. "We will continue to fund our capital requirements in the high-yield market," Hastings wrote in its second quarter letter to shareholders.

The move was very well telegraphed by Netflix, said John McClain, a portfolio manager at Diamond Hill Capital, who has long been in debt, adding that the increase in debt "makes sense for us."

Netflix has announced plans to spend $ 8 billion on content this year. The company had already spent $ 6.9 billion on television and movies at the end of its third quarter, suggesting that if it continues to grow rapidly, its spending in 2018 should be closer to $ 9 billion .

In April, Netflix sold $ 1.6 billion of debt, after raising $ 1.9 billion in November 2017, bringing the total debt to $ 8.4 billion, most of which was increased in the first quarter. during the last three years. Its long-term debt as a percentage of total capital has almost doubled to 65% since the end of 2014.

Last week's record quarterly results, driven by the rise in the number of international subscribers, again eased fears that the global streaming leader lacks room to expand into developed markets, where it can target a public mbad at profitable prices.

But while Netflix still has huge potential in emerging markets such as India, some brokerages have begun to draw attention to the generally high cost it pays as a company to attract more users .

"This is further evidence of Netflix's need for capital to finance short-term operations and content investments," said Richard Miller, founder and managing partner of Gullane Capital.

"This shows that they are further than ever to be positive in free cash flow," he said.

Netflix's existing debt prices fell globally on Monday, with the biggest declines of a bond maturing in 2026 down about 3 cents to 91.5 cents per dollar.

Its Eurobond maturing in 2028 also fell nearly 3 cents to 91.95 cents per dollar.

The bearish bets on Netflix's $ 8.4 billion bad-rated bonds have more than tripled this year to an unprecedented $ 347 million, Reuters reported last week.

Supported

Some 27 of the 43 brokerage badysts who cover Netflix continue to support equities with a "buy" rating, compared to only three with a "sell" rating, although its shares have fallen since last week's results.

This shows that most respondents left him in doubt about the lack of subscribers in the second quarter and that the company has also reduced its negative cash flow forecast to nearly $ 3 billion, whereas it was previously lower at $ 4 billion.

Moody's Investors Service has given a rating of Ba3 to the new notes, either three notches on the junk territory, or the same rating that the agency has awarded to the company as a whole.

Standard & Poor's awarded the proposed issue a "BB-" and "3" recovery rating. The recovery note indicates a significant recovery of approximately 65% ​​of the capital in the event of default.

The rating reflected the improvement in the company's underlying profit margins over the past 12 months, due in part to higher prices and higher subscriber growth.

"These factors reflect the strength of the company's business model and ability to grow globally, increase margins and manage the ever-increasing debt burden," said S & P. .

The new debt will be in the form of senior bonds denominated in dollars and euros – securities that the company will have to repay before any unsecured debt in the event of bankruptcy.

The company now trades nearly 115 times its futures profits, making it the second most expensive cost of the group of great technological bets FAANG, after the 160 times won by Amazon.com, according to data Refinitiv.