Following its highly anticipated first-quarter earnings release on Tuesday -- which showed a massive gain of 15.8 million subscribers -- Netflix (NASDAQ:NFLX) has announced that it is again tapping the debt markets to raise fresh capital. The company is offering $1 billion in senior notes to qualified institutional investors, through a combination of notes denominated in U.S. dollars and euros.

That money will primarily help fund original content production, but Netflix says it might also use the cash for acquisitions or other strategic deals.

Netflix interface

Image source: Netflix.

Binging on bonds

The COVID-19 pandemic has not only driven a spike in new subscriptions, but also helped Netflix's cash flow because production shutdowns have reduced cash spending. Netflix generated $162 million in positive free cash flow in the first quarter, a rare feat for a company known for burning copious amounts of cash in order to build its catalog of original content. CFO Spencer Neumann noted that Netflix would have posted positive free cash flow regardless of the public health crisis.

The video-streaming tech company finished the quarter with $5.2 billion in cash and has not yet drawn anything from its $750 million revolver. Neumann also added that Netflix will probably burn $1 billion or less in negative free cash flow this year, compared to its original forecast of negative $2.5 billion. Once the crisis abates, cash spending will increase as production resumes, but investors should still expect a "multiyear path to sustained free cash flow positive."

Speaking of beating the virus, Netflix warned that viewership and subscriber additions will likely revert to normal levels once COVID-19 is contained. "We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon," the company wrote in its shareholder letter.

Netflix is no stranger to the junk bond market, regularly tapping it for cash. Netflix raised $2 billion last October, with that paper earning a Ba3 rating (three notches into junk territory) from credit rating agency Moody's. Meanwhile, management continues to justify its leverage by pointing to its debt-to-market-cap ratio, an arguably misguided approach to capital structure.

With shares trading near all-time highs, bringing the company's market cap to $185 billion (comparable to Disney), it should come as no surprise that Netflix continues to lever up even though you can't pay interest expense with market value. Interest expense consumed roughly 20% of operating income in the first quarter.

Netflix has always maintained that an optimal debt-to-market-cap ratio is around 20% to 25%, which would imply that the company would be comfortable with a debt load of over $45 billion based on its current market cap. That's about three times as much debt as the streaming pioneer currently has.