Netflix Secures $2Bn Bond To Boost Expansion Plans

American media service provider, Netflix has secured a bond of $2bn to further expand its service and ensure more quality is served to its many subscribers.

According to reports by the Financial Times, Netflix has secured just over $2bn through its latest bond offering, as debt investors continue to foot the bill for the streaming television and movie company’s aggressive programming expansion.

Investors in the company racked up billions of dollars of orders for the deal, although Netflix ultimately paid a slightly higher interest rate than initially expected amid a volatile day for broader financial markets, according to people with knowledge of the deal.

Reed Hastings, chief executive of Netflix, has already turned to the $1.3tn high-yield bond market to pay for original programming, such as Stranger Things, that has helped attract millions of new subscribers.

Netflix said it would pour up to $8bn into content this year, although some analysts think the number could hit $13bn. John McClain, a portfolio manager with Diamond Hill Capital, said he expected Netflix to continue to tap the corporate bond market in the years to come. “They are going to persistently come to market and that’s OK as long as every dollar they are borrowing is creating more than that in value,” he said. “That is certainly the case for them. It makes sense for them to tap the high-yield bond market. Borrowing at 5, 6 or 7 per cent is a much cheaper cost of funding.”

Netflix had finalised a capital raise in both euros and dollars, with the $800m tranche of the bond expected to price with a yield of roughly 6.375 per cent, according to people well grounded in the matter.

The US dollar notes mature in 10 and a half years. The €1.1bn tranche was set to price with a yield of 4.625 per cent, the people added. Yields on both notes were priced an eighth of a percentage point above the levels marketed to investors late on Monday.

Earlier this month Netflix said it had signed up nearly 7m new customers last quarter, well above analysts’ estimates, and forecast that it would add a record 29m subscribers this year. Although Netflix shares have fallen about 20 per cent from the record set in July, they remain up more than 50 per cent this year. Netflix forecasts it will use up to $3bn in cash this year, a sum Mr Hastings insisted will reap long term benefits. “You’re using the word loss and I think you mean investment,” he told analysts on a call this month. “We definitely hope that they’re not turning into losses. A track record would show that those investments have turned out to be very successful for us.”

The company unveiled 676 hours of programming in the third quarter, a company record and more than double from a year ago, according to Cowen & Company.

Netflix’s quality of quantity, the rapid pace at which Netflix uses up cash has been a focus for investors, particularly as other highly valued tech companies such as WeWork and Uber test the junk bond market.

Christian Hoffmann, a portfolio manager with Thornburg Investment Management, said the group of sub-investment-grade companies had so far won the backing of bond investors because of their sky-high equity valuations, even as they lacked “robust credit metrics”.

“Most companies that burn cash and have high leverage, the market normally shies away from,” he said. “But that is not the case here. Some investors feel supported by the loan to value argument.” Analysts with rating agency S&P Global last week upgraded their view of Netflix, lifting their rating one notch to double B minus. Rival agency Moody’s said it believed Netflix would top 200m subscribers by the end of 2021 and that it would stop bleeding cash within five years as its margins rise. Moody’s rates Netflix Ba3, three notches below investment grade and equivalent to S&P’s opinion. The bond sale was being led by Morgan Stanley, alongside Goldman Sachs, JPMorgan Chase, Deutsche Bank and Wells Fargo.

Source: Financial Times



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