Netflix have announced plans to take on an additional $1.5 billion in long-term debt, which the company will use to fund its ongoing content acquisition and global expansion efforts.
The company originally promised a $1 billion offering. However, they later revised that figure to $1.5bn split across two bond offerings. One $700 million offering at 5.50% which becomes due in 2022, and one with an $800 million offering at 5.875% due in 2025.
In a press release announcing the move, Netflix say it will use the proceeds from the offerings for “general corporate purposes, which may include content acquisitions, capital expenditures, investments, working capital and potential acquisitions and strategic transactions.”
Netflix CEO Reed Hastings and CFO David Wells first outlined plans to take on new debt in a letter to shareholders last month. As they continue to focus on international growth, producing new content and acquiring existing popular content will become ever more important as the company continues its overseas expansion efforts.
“Over the next few years we expect to continue financing our original content expansion with long-term debt,” Wells and Hastings wrote in a joint letter to shareholders. “We think long-term debt is the best way for Netflix to finance the production of content.”
During Netflix’s Q4-2014 earnings call, Wells also suggested the company will generate profits faster than analysts expectations, so there’s little reason not to take advantage of today’s low interest rates to fund growth.
However, it seems the credit rating services disagree with Wells’ assessment.
Standard and Poor’s, one of the world’s largest ratings services, has cut Netflix’s credit rating to a B+. This effectively gives Netflix’s newly issued bonds ‘junk’ status, forcing pension funds and other conservative investors that usually snap up bond offerings of this kind of stay away as the risk that Netflix will be unable to pay them back is too great.
S&P made the move after noting Netflix’s additional debt “represents a significant departure from Netflix’s existing debt leverage.”
To date, Netflix had borrowed just $900 million after raising $500 million in 2013 and $400 million in 2014. Now, that number will more than double overnight while pushing their ratio of debt to cash flow (a key indicator of a company’s financial health) from a healthy 1.9 at the end of 2014 to a decidedly unhealthy 5.
There is also a belief among S&P analysts that the $1.5bn will only last the company for two years, as they note Netflix may “seek additional financing in 2016 or 2017” after blowing their budget on new original programming. “We expect that streaming content commitments will continue to increase and that Netflix’s pursuit of more original programming with global rights will increase its cash flow deficits,” S&P concluded.
Earlier this year, Netflix announced plans to release more than 320 hours of original programming in 2015, representing a three-fold increase on their 2014 programming efforts.
Among these new releases are old favorites such as Orange Is The New Black, which returns in June, and House of Cards, which returns on February 27, 2015. The company is also planning half a dozen comedy specials, including a new Aziz Ansari stand-up routine that will be available exclusively on the platform net month.
Netflix is also continuing to acquire new popular content. After striking an exclusive deal that brought the insanely popular sitcom Friends to the platform, Netflix have also acquired the teen comedy movie Expelled, starring popular Vine creator Cameron Dallas.