Netflix $1B Bond Sale Worries Debt Rating Agencies
Netflix formally unveiled today the plan it mentioned to analysts last month to raise $1 billion in debt to fuel its its programming and global expansion efforts. And the debt assessment agencies appear unimpressed: Standard & Poor’s Ratings Services dropped its rating of Netflix bonds from BB- to B+ — a so-called “junk” rating that means they’re too risky for pension funds and others restricted to investment grade bets. Moody’s Investor Service also considers the debt to be too dangerous for many investors, giving it a B1 rating.
Netflix has carried $900 million in long term debt at year-end after raising $400 million last year, and $500 million the year before. And that will continue, CEO Reed Hastings and CFO David Wells said in an investor letter last month. The company will “continue financing our original content expansion with long-term debt. As long as the maturities are spread out, and the interest cost is built into our content budgets, we think long-term debt is the best way for Netflix to finance the production of content.”
Wells told analysts that the company wants to take advantage of today’s low interest rates — and can still generate global profits faster than expected even with the additional debt.
But the debt agencies are wary. The additional borrowing “represents a significant departure from Netflix’s existing debt leverage” — raising it to 5 times cash flow from 1.9 times at the end of 2014 — Standard & Poor’s says today. The company “will likely incur significant discretionary cash flow deficits through 2017″ as programming and expansion expenses mount. That could be a problem: Although the additional $1 billion should suffice for the next two years, “it is possible that Netflix could seek additional financing in 2016 or 2017.”
Moody’s Investors Service warns that it expects “weaker operating results in 2015 and an increase in absolute debt levels.” If that happens, then it might have to drop Netflix’s ranking “particularly if the company issues more than $1 billion of new debt this year, which may be needed to sustain ample liquidity through 2017.”
Moody’s recognizes that Netflix has “evolved into the dominant online content streaming company in the US and some international territories.” Still, its business “continues to be in transition with the next few years being crucial to its developing a profitable streaming business across various international territories that can balance potential saturation in the domestic segment and fully offset the declining profits from the high margin US DVD business.”
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