(Reuters) – Netflix Inc (NFLX.O) announced Monday that it will touch the debt markets for the second time this year, with the aim of raising another $ 2 billion as the streaming video pioneer invests heavily in the production of original shows and acquisition of content to counteract the intensification of competition.
The move, which the company has declared to be aimed at financing a wide range of activities including the payment of new content, has stimulated the fall of both its bond prices and its shares, while investors were worried about the rising costs of its huge investments planned for years to come.
The CEO of Netflix Reed Hastings was explicit about the company's Los Gatos, California, plan to finance the acquisition of content through increased debt. "We will continue to finance our capital needs in the high yield market," Hastings wrote in his second-quarter letter to shareholders.
The move was soon telegraphed by Netflix, said John McClain, portfolio manager for Diamond Hill Capital, who is long in debt, adding that the debt hike "makes sense to us".
Netflix said it expects to spend $ 8 billion in content this year. The company had already spent $ 6.9 billion on TV and film programs by the end of the third quarter, suggesting that if they continue at a brisk pace, their spending for 2018 should approach $ 9 billion.
Netflix sold $ 1.6 billion in debt in April, after raising $ 1.9 billion in November 2017, bringing the total debt to $ 8.4 billion, most of which has been increased over the past three years. Long-term debt as a percentage of total capital has nearly doubled to 65 percent since the end of 2014.
Last week's quarterly results, driven by earnings from international subscribers, have again alarmed concerns that the global streaming leader is running out of space to expand into developed markets where it can reach mass audiences at affordable prices.
But while Netflix still has huge potential in emerging markets such as India, some brokers have begun to draw attention to the high overall cost it is paying as a business to acquire more users.
"This is a further proof of Netflix's capital need to finance short-term transactions and capital investments," Richard Miller, founder and managing partner of Gullane Capital, who is short of equity.
"It shows that they are more than ever positive in cash flow," he said.
Netflix's existing debt prices plummeted across the board Monday, with the largest collapse of a bond maturing in 2026 64110LAN6 =, down about 3 cents to 91.5 cents on the dollar.
Its expiring eurobond in 2028 US170932935 = has also fallen by almost 3 cents to 91.95 cents on the dollar.
Downside bets against Netflix's current $ 8.4 billion of junk bonds have more than tripled this year to a record high of $ 347 million, according to Reuters last week.
About 27 of the 43 brokerage analysts covering Netflix continue to support the "buy" -edited security, compared to only three with "sell" ratings, even though their shares have slipped back compared to last week's results.
This shows that most have now given the benefit of the doubt about a deficit in subscriber numbers in the second quarter, and the company has also cut its projection for a negative cash flow to about $ 3 billion from a previously negative project of $ 4 billion.
Moody & # 39; s Investors Service has assigned a rating of Ba3 to the new banknotes, three notches in junk territory, which is the same assessment that the agency has given to the company as a whole.
Standard & Poor & # 39; s assessed the problem of debt proposed to the recovery rating "BB-" and "3". The recovery rating indicates a significant recovery of around 65% of the capital in the event of default on a payment.
He said the rating reflects the improvement in the underlying profit margins of the company over the last 12 months, driven in part by price increases and subscriber growth.
"These factors demonstrate the strength of the company's business model and its ability to expand globally, increase margins and manage its growing debt," said S & P.
The new debt will be in the form of senior notes denominated in dollars and euros – securities that the company must repay before any unsecured debt in the event of bankruptcy.
The company is now trading nearly 115 times the gains ahead, making it the second most expensive of the FAANG group of major technical bets after Amazon.com (AMZN.O) 160 times, based on Refinitiv data.
Reporting of Akanksha Rana and Sonam Rai to Bengaluru; Kate Duguid in New York; editing by Patrick Graham and G Crosse