What's Up With Netflix, Inc. Borrowing Another $400 Million?

Image source: Netflix.

In its recent fourth-quarter earnings report, Netflix (NASDAQ: NFLX  ) said it would raise another $400 million of long-term debt: "Given the current favorable interest rate environment, we think a prudent step in Q1 is to raise an additional $400 million of long-term debt on terms similar to our $500 million raise last year. At $900 million of total long term debt, we will have an extremely modest debt to equity ratio."

Expanding on the thinking behind this move, CFO David Wells explained:

We don't think that we'll need the money this year or next year. We may not need it at all. But given our expansion plans with international and given our content expansion, which tends to run a little bit ahead on cash, we think the current interest rate environment is pretty attractive. So we're going to add to the balance sheet.

So that's the plan. Why wait? In short order, Netflix formally announced its intention to sell $400 million of senior debt notes, then tapped Morgan Stanley to run the bond sale. The bank set the terms of the loan to 5.75% interest under a 10-year term, benchmarked against 10-year Treasury notes.

Morgan Stanley will also initially own half of the new bonds, with the rest spread across three major investment firms. All four banks can sit on their Netflix bonds or resell them for profit.

This structure is nearly identical to the $500 million bond sale Netflix ran last year.

NFLX Non-Current Portion of Long Term Debt (Quarterly) Chart

NFLX Non-Current Portion of Long-Term Debt (Quarterly) data by YCharts.

The $400 million of new funds is not officially earmarked for anything in particular. "Netflix intends to use the net proceeds from this offering for general corporate purposes, including capital expenditures, investments, working capital and potential acquisitions and strategic transactions," the announcement says -- standard boilerplate stuff that doesn't tie Netflix down to any particular use of the money.

That said, Netflix has said that international growth largely gets funded out of the profits from domestic DVD and streaming services. With that in mind, this $400 million cash injection seems to be the start of an even larger original content push, on top of the several new shows already lined up for a 2014 release.

That's Netflix's capital strategy in a nutshell: Grow international markets as fast as your internal profits will allow, and bet on original productions with borrowed money -- as long as interest rates stay low, anyhow.

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  • Report this Comment On February 07, 2014, at 10:12 PM, AceInMySleeve wrote:

    Well at least they aren't buying shares this time around.

  • Report this Comment On February 08, 2014, at 8:33 AM, Fo45 wrote:

    This debt should open our eyes that Netflix is lying in style. A public company will never borrow money for fun. This is to cover up for millions spent for content and failed international expension. Netflix CEO has a good way of mesmerizing investors by focusing their attention to the members added. It is so easy to join Netflix free trial month that you can have memberships for as many Email that you like. Netflix is attracting younger age segment who would like as much as free stuff they could get and sometime very creative. So how Netflix will a account for these million non paying members? Borrowing money from Morgan stanley so their analysts can upgrade the stock after downgrading it a month earlier.

  • Report this Comment On February 09, 2014, at 9:27 AM, 24penny wrote:

    What is the point of this fluffy article? to plug David Gardner at the end?

    I agree with Fo45. It smells like MS changed their position in order to get the debt deal. And it works for NFLX execs by pumping the overinflated stock price, they can still make money from the newly acquired options that have high purchase prices.

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