NETFLIX is positioned to double its debt as the company considers selling junk bonds to help finance costs for films and television shows that have surged to almost $5bn from $2.4bn in June 2011.
Netflix, with $200m of nonconvertible obligations that are callable last November, may take advantage of interest rates at record lows to refinance those securities and sell more debt to help fund original programming, the firm said last week. Netflix is reviving Arrested Development, the comedy TV show cancelled in 2006, and its House of Cards political series featuring Kevin Spacey debuts on February 1.
The world’s largest online video service could borrow an additional $370m and still have less leverage than the average of similarly rated companies. While Moody’s Investors Service last month reduced Netflix’s credit rating partly because of increased competition, a plunge in borrowing costs may allow the Los Gatos, California-based company to sell bonds at a rate below 6%, down from more than 8% in 2009.
"Depending on where price is, you’re always going to find interest in this market because everybody needs yield and wants yield," Noel Hebert, of Concannon Wealth Management, said.
"Between $300m and $350m of incremental debt sounds doable."
Netflix issued $200m of eight-year bonds in November 2009 with an 8.5% coupon, before average yields on junk bonds plummeted more than 350 basis points, or 3.5 percentage points, to an unprecedented 6.41% on Friday.
A similar offering this week may come with a coupon closer to 5.36%, the average yield for the $29.7bn of bonds of similar maturity and rating tracked by Bank of America Merrill Lynch. Netflix is rated BB-by Standard & Poor’s (S&P) and an equivalent Ba3 at Moody’s. "From their perspective, I can see why the timing now may work," Andy Liu, a credit analyst at S&P, said. "The debt market is still very, very robust, and we definitely see a good number of companies trying to take advantage of the market conditions."
Even with stock that is valued higher relative to earnings than every member of the S&P 500 index including Amazon.com, Netflix chief financial officer David Wells last week ruled out raising money through additional shares or convertible securities.
"No on stock, no on convert," he said at last Wednesday’s conference call with analysts to discuss fourth-quarter earnings. "It’s a good time to lock in very low cost long-term capital. So we’d be remiss in not looking at that opportunity."
Jonathan Friedland, a spokesman at Netflix, confirmed the company was exploring an offering of straight debt "because rates are cheaper now."
Netflix is also the least leveraged of the 15 companies in the S&P 500 that are rated BB-, from memory-chip-maker Micron Technology to home builder DR Horton.
The streaming firm’s ratio of debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) was 2.1 on December 31, less than half the average of six among its peers. Operating with that level of leverage would leave room for about $571m of debt, according to data based on trailing 12-month Ebitda of about $95m, which analysts estimate will jump to $270m this year.
Total debt of $200m excludes an equal amount of convertible notes issued in 2011 to Technology Crossover Ventures, which provided financing to Netflix before the company went public in 2002, that pay no interest and can be swapped for shares at $85.80 each before December 2018. The stock closed on Monday at $162.11, about 559 times current earnings.
Equity investors including Carl Icahn are showing confidence in the company’s ability to use exclusive content to lure subscribers with shares surging 75% this month, outperforming every member of the S&P 500 index.
Netflix said last week it signed 2.05-million new US internet subscribers in the quarter, bringing domestic online customers to 27.2-million. Mr Icahn, who disclosed a 10% stake in Netflix last year, said on the day the earnings were reported that he saw further room for shares to climb.