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Netflix to Raise Another $2 Billion Through Debt to Fund Massive Content Spending

UPDATED: Netflix, burning boatloads of cash with a projected $15 billion content budget for 2019, is adding to its debt load once again.

On Monday (Oct. 21), Netflix announced plans to offer approximately $2.0 billion aggregate principal amount of junk bonds, in both U.S dollar and euro denominations. On Oct. 22, the company announced that pricing for the bond offering was upsized to around $2.2 billion (comprising €1.1 billion aggregate principal amount of 3.625% senior notes due 2030 and $1.0 billion aggregate principal amount of its 4.875% senior notes due 2030).

As of Sept. 30, Netflix reported $12.43 billion in debt, up from $10.36 billion at the end of 2018. The latest proposed debt offering would be the eighth time in the last five years that Netflix is raising $1 billion or more through debt. The streaming giant last raised $2.2 billion in junk bonds in April 2019.

Netflix continues to spend billions on programming, as it faces a wave of new streaming rivals coming to market including Disney, Apple, WarnerMedia and NBCUniversal. Netflix needs the funding to cover a content budget projected to be $15 billion in 2019 on a gross-cash basis. Last week, in announcing third-quarter 2019 results, Netflix told investors that it planned to raise more debt. For the full year 2019, the streamer expects free cash flow to be negative $3.5 billion (versus $3.0 billion last year).

“With our quickly growing revenue base and expanding operating margins, we will be able to fund more of our content spending internally,” the company told shareholders in its Oct. 16 letter. “As we move slowly toward [free cash flow] positive, our plan is to continue to use the high-yield market in the interim to finance our investment needs.”

To date, Netflix hasn’t paid down any significant amount of the long-term debt. It paid $160.7 million in interest expense for Q3 (about 3.1% of quarterly revenue) compared with $108.9 million (2.7% of revenue) in the year-earlier period.

For the third quarter of 2019, Netflix reported revenue up 31% year-over-year and touted a 16.5% increase in average revenue per customer (ARPU) for its U.S. streaming customer base. The company undershot domestic subscriber growth targets for Q3, but the miss was not nearly as bad as the previous quarter.

In addition to long-term debt, Netflix has billions in off-balance-sheet content spending obligations, most of which are due within the next three years. As of Sept. 30, 2019, the company had $19.1 billion of content-payment obligations, including $10.8 billion not on its balance sheets “as they did not yet meet the criteria for asset recognition,” per its 10-Q filing last Friday. According to Netflix, on average, it expects over 90% of its licensed and original streaming content assets to be amortized within four years after its month of first availability on the service.

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