Netflix's history says return to junk bond market is coming soon

[LONDON] If history is any guide, Netflix Inc will be coming back to the junk bond market soon to fund its growing output of TV shows and movies.

The streaming giant, which has already flagged to investors that it plans to return to the market, has issued debt in every October for the past three years, and analysts expect this month to be no different.

The company met with investors in London and New York last month at a bank conference where it indicated another bond sale could be coming in October, according to people familiar with the matter who asked not to be identified because the matter is private.

Netflix will spend about US$14.5 billion on programming this year, a total that includes licences for reruns as well as original programmes like Stranger Things and The Irishman. The company has accelerated its spending to supply programming all over the world, from dramas in India and Spain to reality programs in Mexico.

The company already has more than US$12 billion in long-term debt. Its growing demand for fresh programming has forced it to borrow in spite of its mushrooming sales. Annual sales should surpass US$20 billion this year, more than double just a few years ago.

"Our plan is still to use high yield debt to fund our content investments as we did in April," the company said in a July letter to shareholders.

Rivals circling

Analysts also expect the issuer to soon surface with a deal, and it typically emerges after earnings. Netflix reports on Oct 16.

A representative for Netflix declined to comment beyond the statement in the July letter.

"With US$5 billion of cash on hand and guidance for an incremental about US$2.5 billion of cash burn in H2 2019 (and continued burn in 2020), we would not be surprised to see Netflix extend its late-October streak of raising additional bond financing to a fourth consecutive year," analysts at CreditSights said in a recent note.

Its Ba3/BB-/BB- credit ratings, which sit in the top band of the junk bond scale, will likely appeal to investors who have been clamouring for higher quality bonds.

Yet an offering may face slightly more investor scrutiny than usual amid growing focus on increased competition from emerging rivals including Apple TV, Walt Disney Co, AT&T Inc and Comcast Corp, and pressure on subscriber growth.

Investors who met the company last month also cited concerns about its spending needs for content and fast cash burn potential, the people said. That cash burn could reach US$2.4 billion in the second half of the year and almost US$3 billion for 2020, according to analysts at Bloomberg Intelligence.

Still cheap

That has weighed on Netflix bonds. The company's 1.1 billion euros (S$1.67 billion) senior unsecured notes have fallen five points from their highs amid worries about weaker subscriber growth.

Yet even the company's longest-dated 10-year US dollar bonds still yield less than 5 per cent, according to Trace pricing. That shows financing costs should still be cheap for the company that will also need to start chipping away at debt coming due in the next couple of years.

Analysts at CreditSights say the operational risk posed to Netflix from most of its competitors is relatively modest over the next six to 12 months.

"The entrance of a new competitor with Apple's massive scale and financial firepower is worth monitoring, but we believe that Apple TV+ is not a realistic substitute for Netflix in its current form," CreditSights said.

"Netflix provides its subscribers with a credible one-stop shop."

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