Streaming giant Netflix raised just over US$2bn of debt in the high-yield bond market on Tuesday in a deal that will help fund the company for a decade.
The 10.5-year bond priced in a choppy market at the wider range of levels initially expected, according to a person familiar with the matter.
Its US$800m portion priced at 6.375%, or the wider range of talk in the 6.25% area. The larger €1.1bn portion priced at 4.625% after being talked in the 4.5% area.
“Both saw a nice level of oversubscription despite a very difficult market environment on both sides of the Atlantic today,” the person said.
Past borrowing by the company has relied heavily on the deep well of the US bond market. But the latest raise is a nod to the streamer’s global footprint.
“They’ve got a significant business in Europe and have financed the bulk of their funding in dollars,” the person said. “In some ways this is balancing.”
Netflix, as of September 30, had more than 130m paid domestic and international streaming subscribers, according to the company’s latest 10-Q.
And it streams videos in most countries except China, according to Morningstar.
The new bond deal brings total long-term debt at Netflix to almost US$11bn, the person said. Gross leverage will also increase to 6.2 times, according to Moody’s.
Joint bookrunners for the bond offering are Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Wells Fargo.
MONEY TO BURN
The long-term financing will help to fund the cash-burning company over the next decade.
Netflix expects negative cashflow of US$3bn this year, down from a US$4bn burn estimate, and for negative flows to hold around US$3bn in 2019.
“The market will tolerate this as long as the subscriber base continues to grow and margins are improving,” said Greg Zappin, a managing director and portfolio manager at Penn Mutual Asset Management.
The company joins a rare breed of high-yield companies that have been able to raise 10-year debt this year. In April, it raised another US$1.9bn in the dollar market at a lower 5.875% yield.
But only 21 tranches issued in the US high-yield so far this year had a duration of 10 years or longer, out of a total of 279 tranches that have priced, according to IFR data.
“Ten-year issuance, particularly in European high-yield, has not been the norm,” said Ken Monaghan, co-director of high yield at Amundi Pioneer.
“We’ll see if that sets a new benchmark.”
The deal comes as demand for junk-bonds has remained strong amid lower supply, particularly for household names with a technology focus like Netflix, Tesla, Uber and WeWork, which also have yet to become profitable. nL8N1WY62M
And borrowing costs in high-yield have rarely been more attractive for issuers looking to add debt.
In January, spreads on Double B rated corporate debt hit a post-credit crisis low of 192bp over Treasuries, down from a six-year high of 582bp over Treasuries in February 2016, according to IFR data.
Netflix is rated Ba3 by Moody’s and, as of last week, BB- by S&P.
S&P said its one-notch upgrade was based on the company’s ability to raise prices for its services while still growing its overall subscriber base.
Netflix started out in the late 1990s as a DVD rental site and has since become a producer of original online content including “House of Cards” and award-winning feature films.
It started issuing debt in the dollar market in 2009, according to IFR data.
The new financing will help the popular streaming service create new content, purchase new shows and fund general corporate purposes.
It faces heated competition from other original content providers like Hulu, HBO, Showtime, and Amazon.
The Walt Disney Co recently said that it will pull its movies from Netflix next year and launch its own streaming service.
