Plans underway for Netflix to sell another $2 billion of junk bonds

on Oct 23, 2019
Updated: Apr 15, 2020
  • Netflix plans to issue another junk-rated bond worth $2 billion
  • The debt will go towards improving content production and development in the wake of cut-throat competition in the streaming sector
  • Netflix assured its investors that this was the last of its bonds and that it intended on reducing its losses from next year

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Netflix (NFLX) has confirmed that it intends to issue junk-rated debt bonds predominantly in euros and dollars. This is in line with their plan to explore new content ideas in the wake of increased competition in the streaming industry.

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While the maturities for the bonds remain unspecified, Netflix said it would use the funds for potential acquisitions while boosting production and development.

Deep pocket-competitors including Apple and Disney have been positioning themselves in the lucrative streaming services business. Disney is keen on undercutting the streaming giant’s prices with its plus plan going for $6.99 per month compared to Netflix’s $8.99 monthly basic plan.

Apple (AAPL), on the other hand, is already creating a lot of hype among Apple enthusiasts. Apple TV+ is currently priced at $4.99 a month, with a one-year free viewership upon the purchase of any new Apple product. But Apple may have to wait a little longer before it can actually become Netflix’s headache since its content is still a bit slim compared to the latter. Nonetheless, Apple is said to be eyeing strategic acquisitions to keep up with the competition.

A week ago, Netflix said it was indeed bracing itself ahead of the looming slew of competitors. The company believes that the competition may hurt its new subscriber targets.

“The launch of these new services will be noisy,” Netflix executives said in their quarterly letter to shareholders. “There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance.”

It is not the first time Netflix intends to finance its acquisitions and production using junk bonds. The firm’s long-term debt currently stands at $12.5 billion. According to bonds trading tool MarketAxess, Netflix’s most active bonds which include the 5.875% notes were quoted at a spread yield of 271 basis points above similar Treasuries.

While necessary today, in the long run, the company’s debt financing may not be sustainable. Netflix continues to assure investors that it will stop taking new debt in 2020 while cutting down on their losses. But most people are simply not taking their word for it.

“If you look at the free cash flow of the company, these are just hopes and dreams that they’ll have free cash flow in the future,” said Cole Smead, managing director of Smead Capital Management. He believes that in the near future, Netflix may still need to tap into the bond market if it is to remain afloat.

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