After Uber, Netflix May Be Next to Tap Starved Junk Market
(Bloomberg) -- Investors should get ready for a new bond issue from Netflix Inc.
Following a bullish earnings surprise on Tuesday that boosted the stock by almost 10 percent, the world’s largest television network may seek to ride on the coattails of Uber Technologies Inc., which this week raised $2 billion amid the biggest high-yield issuance slump in a decade. Yesterday’s hawkish Federal Reserve minutes served as a reminder of higher borrowing costs ahead.
Analysts at CreditSights Inc “expect that the company may look to take advantage of strong market sentiment following a solid set of earnings and tap the HY market,” they wrote in a note on Thursday.
Netflix didn’t comment on a potential deal in its latest earnings call or presentation, and did not answer requests for comment on Thursday. The company said in a July 16 earnings statement that it would “continue to finance our capital needs in the high yield market”. The company last issued junk bonds in April and before that, in October, setting a rhythm of raising funds just after first and third quarter earnings.
Morgan Stanley analysts wrote earlier this year Netflix may return this year to raise as much as $1.8 billion in bonds, flagging both euro and dollar markets as a possibility.
High-yield bond issuance in the U.S. has slumped this year as rising rates steered borrowers away, refinancing dried up and investors leaned toward the leveraged loan market. The lack of deals, the worst supply shortage since 2008 according to JPMorgan Chase & Co analysts, has kept high-yield spreads tight and helped firms like Uber to raise large sums, despite burning through billions of dollars of cash.
Netflix’s scale and rapidly growing earnings will be attractive to bond investors, the CreditSights analysts wrote. “While continued free cash flow burn north of $3 billion annually is not the type of metric credit analysts like to see, rapid Ebitda growth delevers the business fairly quickly; it also helps maintain a healthy interest coverage ratio.”
Adjusted third-quarter earnings totaled $584 million, more than double the same figure from 2017. The company said it expected free cash flow burn for the year to be at the low end of its $3 billion to $4 billion range, and a similar figure for 2019.
To be sure, the omission of a reference to debt plans in its latest earnings may indicate the company will wait until early 2019 before issuing again. It has more than $3 billion on its balance sheet to finance its cash burn to the end of the year and no substantial debt obligations until 2021.
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