Netflix announced terms of $2 billion in debt securities, which will bring its long-term debt to more than $10 billion as the streamer seeks more cash to continue buying up content.
The company on Monday announced plans to raise the new debt — the sixth time in less than four years it’s raising financing with junk bonds. Netflix said it is issuing €1.1 billion ($1.26 billion) in notes at 4.625% due 2029 and $800 million of its 6.375% notes, also due 2029.
The company expects the sale of the debt securities to close on Oct. 26, 2018, subject to customary closing conditions. Netflix will begin paying interest semi-annually beginning on May 15, 2019.
“We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past,” Netflix said in its Oct. 16 letter to shareholders. “These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead.”
Netflix reported $8.34 billion in long-term debt as of Sept. 30, 2018, up 71% from $4.89 billion a year prior. The company — which is expected to shell out some $13 billion in content expenditures this year — told investors it will continue to operate at negative cash flow for at least another year.
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For the third quarter of 2018, Netflix’s free cash flow was -$859 million (compared with -$465 million in the year-earlier quarter). For full year 2018, the company expects free cash flow will be closer to -$3 billion than to -$4 billion, and that negative free cash flow in 2019 will be roughly flat with this year.
Netflix has argued that its debt levels “are quite modest as a percentage of our enterprise value,” and has maintained that debt financing is a cheaper way to raise capital compared with equity, per its Q1 2018 letter to shareholders. The company’s interest payments in the third quarter of 2018 totaled $109 million (2.7% of revenue) versus $60.7 million (2.0% of revenue) in Q3 of 2017.
Netflix also has billions in off-balance-sheet content-spending obligations, most of which is due within the next five years. As of Sept. 30, 2018, the company had $18.6 billion of obligations, which includes $10.2 billion due in one year or beyond.
On Monday, Moody’s Investors Service assigned a “Ba3” junk-bond rating to Netflix’s proposed offering, indicating a non-investment grade “speculative” security. The outlook for Netflix remains “stable,” according to Moody’s, which “reflects our expectation that Netflix’s operating results will improve gradually and the company will de-lever through revenue, EBITDA and margin growth.”