Netflix snags lowest junk bond yields in binge-watching frenzy

[CALIFORNIA] Netflix pulled in record subscribers after people hunkered down at home amid the virus pandemic. It's also set to pull in record-low yields for its bonds.

Investors are clamoring for Netflix's latest US$1 billion (S$1.43 billion) offering of dollar-denominated and euro bonds, after the streaming service emerged as a beneficiary of the unprecedented health crisis keeping people at home.

Demand is so strong, with orders at about ten times the offering size, that Netflix was able to reduce yields on both portions on Thursday, according to people familiar with the matter. The dollar bonds may now sell at a 3.625 per cent yield, among the lowest ever seen in the US high-yield bond market and in line with prices typically offered on investment-grade bonds. The euro portion is being offered at 3 per cent, the people said.

As the virus cripples businesses globally, investors are craving debt from companies in better shape to ride out the Covid-19 environment. Netflix added a record 15.8 million subscribers in the first quarter and turned its first quarter of positive free cash flow since 2014 as it benefited from a larger captive audience.

WAR CHEST

Still, Netflix remains a few years away from achieving sustained positive free cash flow, so it makes sense to build up a war chest especially at such cheap rates, according to Bloomberg Intelligence analyst Stephen Flynn.

"Given the outlook for many high-yield issuers is so uncertain in response to the pandemic, Netflix may offer a much higher level of certainty in future performance given its business model," he said. The model "is well-situated for a social-distanced environment," according to Mr Flynn.

The kinds of low yields Netflix may pay were last seen before the virus sparked the biggest sell-off since the financial crisis. Technology firm PTC priced a US$500 million five-year bond at 3.625 per cent in January, while VICI Properties got a US$750 million deal at 3.5 per cent that month.

Representatives for Morgan Stanley, which is leading the bond sale, declined to comment and a representative for Netflix didn't immediately respond to a request for comment.

Netflix intends to use the net proceeds for general corporate purposes, which may include content acquisitions and for production and development.

BLOOMBERG