Netflix grabs spotlight with IG debut
Netflix printed its first bond offering as an investment-grade borrower on Tuesday, attracting blockbuster demand from investors eager to gain exposure to the international streaming giant, which has not issued since 2020.
The US$1.8bn sale of 10 and 30-year bonds booked more than US$16bn of orders on the back of positive sentiment about the once junk-rated credit, a beneficiary of the global shift away from legacy television.
After Netflix achieved full high-grade status last year, Moody's and S&P have continued to raise the California-based company's credit ratings, most recently to Baa1/A in late July, following strong second-quarter results. The higher ratings have allowed Netflix to access a broader investor base and push out bond tenors for longer.
"The [investment-grade] market tends to like new issuers and this is the first time Netflix is issuing long-dated debt," said Adam Coons, co-chief investment officer at Winthrop Capital Management.
High-yield borrowers are in general limited to tenors of up to 10 years.
Active bookrunners Morgan Stanley, Goldman Sachs, JP Morgan and Wells Fargo led the SEC-registered offering of US$1bn 10-year and US$800m 30-year senior unsecured notes. Netflix priced the tranches early on Tuesday afternoon at 80bp and 100bp, respectively, equivalent to a coupon of 4.9% and 5.4%. Both notes tightened 30bp from initial price thoughts.
The deal's swift marketing pointed to investor appetite for the offering, which launched in New York at around 10:30am, said Coons. That timing was much earlier than when US high-grade deals typically launch.
"There's a lot of enthusiasm and there are a lot of line items which have put in big orders," said a lead banker.
The transaction will be used to roll over around US$1.8bn of bonds coming due next year, but the financing exercise may not lead to much interest savings for Netflix.
A large chunk of the targeted 2025 maturities was printed at the start of the global pandemic when rock-bottom interest rates allowed even US high-yield borrowers – which Netflix was at the time – to print ultra-low coupons.
Netflix is refinancing an US$800m 5.875% senior note due February 2025, a €470m 3% senior note due June 2025 and a US$500m 3.625% bond due June 2025.
Rating momentum
In its last trip to the US market four years ago, Netflix sported ratings of Ba3/BB–. Improving financial results and successful efforts to reduce leverage have since then earned the company a string of upgrades.
In July, S&P upgraded the issuer by two notches to an A rating from BBB+, noting the company's debt reduction had outpaced forecasts. Moody's delivered a more modest single-notch upgrade in the same month, lifting Netflix to Baa1 from Baa2.
Money managers participating in the deal hope to benefit from the company's upward trajectory, as additional upgrades would tighten Netflix's spreads.
"Investors get to ride along with a very well-known company, and they can wait for that further upside," said the banker.
While Netflix spends billions of dollars every year on streaming content, it now generates significant cash, with revenues in the most recent quarter up 16.8% year on year. S&P said Netflix's introduction of measures last year to limit password sharing among its customers helped bolster sales.
The company expects to produce US$6bn of free cashflow in 2024, a turnaround from just five years ago when it reported negative cashflow.
Netflix's improving financial profile stands out amid the broader media industry's difficulties. The average media company's investment-grade bond traded at 130bp over Treasuries on Tuesday, 34bp wider than the broader index, according to ICE BofA data.
The sector's wider spreads reflect how legacy media companies such as Paramount are burning cash to build out their own streaming platforms while pivoting away from television businesses that are profitable but face uncertain futures.
"Netflix is a clear positive outlier in a troubled IG media sector," CreditSights analyst Hunter Martin wrote on Tuesday, noting the paucity of comparable media companies with Single A ratings. "The company has achieved industry leading scale in the growing global streaming video market ... and has zero exposure to the secularly declining linear video ecosystem."