It's been about six months since video-streaming leader Netflix (NASDAQ:NFLX) tapped the high-yield bond market, raising $2.2 billion in senior notes back in April. This morning, the company announced a new proposed offering of another $2 billion in senior notes that will ultimately be used to help fund content production ahead of the launch of several prominent competing video-streaming services next month.
Here's what investors need to know.
Long-term debt to increase to over $14.4 billion
The offering will only be available to qualified institutional investors and Netflix has not yet priced the deal, so key details like the interest rate, redemption provisions, and maturity dates aren't finalized yet. The paper will be denominated in U.S. dollars and euros, similar to the April offering.
For reference, that previous offering priced at 3.875% for the euro-denominated tranche, while the dollar-denominated notes carried a 5.375% interest rate. Those bonds are due in 2029. Credit rating agency Moody's had rated the offering Ba3, or three levels into junk territory, while predicting that the company's leverage should decline going forward.
"However, despite the continuing issuances of debt to fund the company's negative cash flows, we expect leverage to drop gradually over time with subscriber growth, as the transition from licensed content to produced original content levels off, international markets mature and begin to contribute to profits, all which we expect to contribute to margin improvement," Moody's said at the time.
The news is a familiar cycle for Netflix investors. The tech company has long relied on the junk bond market for capital, and management has made it abundantly clear that it will continue to do so for the foreseeable future, regularly pointing to its debt-to-market-cap ratio as justification. Management has previously said Netflix's optimal capital structure would include a ratio of around 20% to 25%, compared to its current debt-to-market-cap ratio of around 10%.
After factoring in the new offering, Netflix's total debt load will increase to over $14.4 billion, or nearly 12% of its current market cap.
Focusing on cash flow in 2020
Apple and Disney are gearing up to launch rival services in the weeks ahead, and Netflix acknowledged that customer churn ticked higher last quarter due to price changes, as well as "new forthcoming competition." The company still downplayed competitive fears, noting that it has always competed with all sorts of services for entertainment time. It's not just about streaming services.
"The launch of these new services will be noisy," Netflix wrote in its third-quarter shareholder letter. "There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance."
CFO Spencer Neumann said earlier this month that Netflix is committing to improving its negative free cash flow in 2020, after forecasting free cash flow at negative $3.5 billion for 2019.