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Wednesday, 13 December 2017

Netflix to make European junk-bond debut

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Netflix will make its debut in the European bond markets this week with a €1bn 10-year deal expected to finance the production of more original content and help grow its non-US business.

The video streaming giant looks to be diversifying its funding sources and establish a decent benchmark issue in a market where the company is hoping to expand its customer base.

But the offering is also a kind of wager that Netflix (B1/B+), which already has more than US$3bn of long-term debt, will convince investors that its growth plans make sense.

While producing more of its own shows could help improve its margins, production is an expensive option for a company whose track record in original production is still relatively limited.

In its quarterly letter to investors earlier this month, Netflix said it expects to deplete around US$2bn in cash this year alone to invest in new content.

“Netflix is one of those stories where you are either a big believer or you are out,” said Rahim Shad, a senior junk-bond analyst at Invesco.

“They could double their size if they wanted over the next 15 years, and debt is not high enough to freak out the market.”

Early yield indications for the new offering, expected to price later this week, were heard at about 4%.

The nearest comparable is Netflix’s US$1bn bond printed in October 2016, which priced at 4.375% - at the time the lowest coupon ever on a Single B rated 10-year US dollar bond.

Those notes were quoted on Monday at a yield of around 4.5%, which is more than 100bp inside the 5.7% average yield seen across Single B credits in the US markets.

Indeed, that was more in line with the 4.4% average of higher rated Double B issuers, according to Bank of America Merrill Lynch index data.

 

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Still, European investors are typically less comfortable buying 10-year non-callable bonds from high-yield issuers.

Netflix’s new deal would be only the second 10-year bond to hit the European high-yield market this year, following a trade from jeans maker Levi Strauss in February.

There were just two 10-year bonds issued in the European primary markets in 2016, compared with 15 in 2015.

Its bond sale in Europe is expected to take Netflix’s financial leverage to over 7 times, according to rating agencies Moody’s and S&P.

In a note earlier this month, JP Morgan analysts said Netflix is on track to reach over 160m subscribers by 2020 from around 100m currently, with the vast majority of additions coming from outside the United States.

Morgan Stanley, JP Morgan, Goldman Sachs and Deutsche Bank are bookrunners on the Netflix bond.

 

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