Netflix Can’t Wait to Issue More Debt

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Strike while the iron is hot, they say. Netflix Inc. (NASDAQ: NFLX) has taken that advice following last week’s earnings beat. The streaming video giant said Monday morning that it plans to issue approximately $2 billion in two new senior unsecured dollar- and euro-denominated notes to qualified institutional buyers. The offer is subject to market and other considerations.

Following the earnings beat, analysts began forecasting potential share price gains of 14% to 20% and price targets well north of the stock’s current 52-week high of around $423.

On Thursday, S&P Global boosted its rating on Netflix debt from BB- to B+ with a stable outlook. That’s still junk, but it’s a one-notch better class of junk. And S&P Global said this may not be the end of ratings upgrades:

We could raise the rating if Netflix maintains a strong leadership position in the [over-the-top, streaming] marketplace through robust subscriber, revenue, and EBITDA growth exceeding our base-case expectations while significantly reducing free cash flow deficits. This would demonstrate that the company can leverage its expanding subscriber base to moderate content spending per user growth.

Netflix appears unconcerned about moderating content spending, however. In April the company sold $1.9 billion in junk bonds due in 2028 at a coupon of 5.875%. Netflix also has said that it plans to continue supporting its cash needs with junk bonds because the after-tax cost of debt remains lower than the cost of equity, even with rising interest rates and lower corporate tax rates. That condition may not hold for much longer, but while it does Netflix plans to take advantage of the discount.

Netflix said it intends to use the net proceeds for general corporate purposes, including content acquisitions, production and development, capital expenditures, investments, working capital, and potential acquisitions and strategic transactions. The company said that interest rates, redemption provisions, maturity date and other terms of each series of notes will be negotiated with the buyers.

With Disney due to enter the streaming market early next year, Netflix almost has to spend big now so that it has something to compete with when the House of Mouse gets in the game. New subscriber numbers jumped in the third quarter after a disappointing second quarter. That number must keep improving in order to support Netflix’s high valuation and analysts’ expectations.

The 2028 notes issued in April have traded at a high of $102.25 (yield of 5.58%) in late June to a low of $97.53 (yield of 6.21%) on October 10, before Netflix announced third-quarter results. On Friday the notes closed at $98.62 (yield of 6.06%).

Netflix shares closed down about 4% on Friday at $332.67 in a 52-week range of $178.38 to $423.21. Shares traded down more than 3% early Monday morning at $322.20. The stock’s 12-month consensus price target is $398.27, and the forward price-to-earnings ratio is 76.73.