Netflix's not-so-secret weapon to win the streaming wars

Netflix is arming itself for an intensifying streaming war against well-heeled rivals.Faced with staggering content costs, Netflix is turning to a rel...

Posted: Apr 26, 2019 9:49 AM

Netflix is arming itself for an intensifying streaming war against well-heeled rivals.

Faced with staggering content costs, Netflix is turning to a reliable recipe to meet its vast cash needs: raising junk bonds.

Netflix, bracing for competition from the likes of Disney, revealed plans this week to issue another $2.2 billion of high-yield debt.

The king of the streaming world can deploy the funds to help plug the notorious cash burn that has underpinned its rapid subscriber growth. For years, Netflix has splurged to produce blockbuster original hits, such as "Bird Box" and "House of Cards," while simultaneously licensing costly shows such as "The Office" and "Breaking Bad."

"Netflix has been a serial issuer of debt," Patrice Cucinello, director at Fitch Ratings, told CNN Business. "It's necessary in order to compete in this landscape where everyone is bulking up."

Even though Netflix is considered a risky borrower due to its epic cash burn, the company had no problem borrowing more money at generous terms.

In fact, very strong demand allowed Netflix to raise more cash -- and borrow more cheaply -- than it anticipated. Netflix said the deal, which is expected to close next week, will give it funds that can be used for content, production and other purposes.

"Investors want to put their money where new media is," Cucinello said.

Netflix is no stranger to the junk bond market. The company has raised $12.8 billion of high-yield debt since November 2009, according to research firm Dealogic. More than three-quarters of that haul has come in just the past three years.

That corresponds with Netflix's intensifying cash burn. The streaming giant has burned through $7.6 billion over the past four years.

Will old media catch up to Netflix?

That strategy has paid off. Netflix is now on the brink of 150 million subscribers.

"That type of distribution is hard to match," Cucinello said.

But traditional media companies will certainly try.

Disney revealed plans earlier this month to launch its own streaming service later in 2019. Priced at just $6.99 a month, Disney+ could pose a formidable adversary for existing streaming services like Netflix and Hulu.

AT&T's WarnerMedia, the parent company of CNN, plans to launch its own service by the end of 2019.

NBCUniversal, meanwhile, announced in January it will debut a streaming service in 2020. And that rival platform could take away streaming stalwarts like "The Office" and Friends" from Netflix. NBCUniversal has reportedly begun internal talks about removing "The Office" from Netflix when the show's contract expires in 2021.

Netflix's unsustainable balance sheet

Against that backdrop, Netflix warned earlier this month it will burn through another $3.5 billion of cash in 2019, up from its earlier projection of $3 billion.

"There's no change to our plan to use the high yield market to finance our cash needs," Netflix told shareholders in a letter this month.

Of course, that kind of borrowing isn't sustainable forever.

Following the latest junk bond sale, Netflix's gross leverage will climb to 7.5 times its adjusted profits, according to Moody's.

Netflix could be downgraded deeper into junk if "negative cash flows persist at high levels" or "leverage remains stubbornly high," Moody's analyst Neil Begley wrote in a report this week.

Stress in financial markets would be bad news for Netflix as well. Some risky companies were unable to borrow at affordable rates late last year when global markets seized up.

Netflix could be downgraded "if liquidity issues arise" due to problems accessing capital markets, Moody's wrote.

Junk bonds are booming again

Netflix, like other junk borrowers, is in no rush to see the Federal Reserve resume raising interest rates.

"High-yield companies, especially serial issuers like Netflix, are big beneficiaries of low interest rates and strong capital markets," Cucinello said.

It certainly helps that the junk bond market is booming. High-yield bonds are off to their strongest start to a year since 2009, according to Bespoke Investment Group.

Nearly $72 billion of junk bonds have been sold in 87 deals so far this year, according to Dealogic. That puts the junk bond market on track to easily surpass last year's $163 billion haul.

Break even by 2023?

Wall Street is not fazed by Netflix's debt binge.

Netflix shares have spiked nearly 40% this year, easily surpassing the S&P 500's robust gains.

Investors have confidence that Netflix's early investments on content will eventually pay off, putting the company on a more sustainable trajectory.

"We're still expecting free cash flow to improve in 2020 and each year thereafter, driven by our growing member base, revenues and operating margins," Netflix said in its shareholder letter.

The goal is for Netflix to eventually fund its content needs by using internally-generated cash.

Moody's anticipates Netflix's leverage ratios will "drop gradually over time" as the company matures and content costs level off.

Netflix even "has the ability," according to Moody's, to break even on cash flows by 2023.

If that happens, the junk bond market could lose one of its most frequent visitors.

Indiana Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 115407

Reported Deaths: 3566
CountyConfirmedDeaths
Marion21196765
Lake10493323
Elkhart6528110
St. Joseph6392106
Allen6178202
Hamilton4848109
Vanderburgh360930
Hendricks2715123
Monroe256036
Tippecanoe239113
Johnson2305123
Clark221457
Porter213647
Delaware194262
Cass19419
Vigo182526
Madison164375
LaPorte142340
Floyd135862
Howard130563
Warrick128038
Kosciusko121617
Bartholomew116457
Marshall100824
Dubois96919
Boone96846
Hancock92143
Grant91934
Noble90832
Henry79826
Wayne75414
Jackson7499
Morgan71638
Shelby67229
Daviess66328
Dearborn66028
LaGrange63411
Clinton59914
Harrison57624
Putnam56412
Knox5159
Gibson5114
Lawrence51129
Montgomery50821
White48514
DeKalb47611
Decatur45839
Miami4353
Greene42435
Fayette42113
Jasper3942
Steuben3807
Scott37311
Sullivan33712
Posey3240
Jennings31312
Franklin30725
Clay3005
Ripley2968
Orange28824
Carroll27413
Whitley2707
Washington2651
Wabash2648
Starke2637
Adams2613
Wells2614
Jefferson2483
Spencer2413
Fulton2382
Huntington2363
Tipton22622
Perry22113
Randolph2167
Jay1800
Newton17311
Owen1681
Martin1640
Rush1554
Pike1471
Vermillion1280
Fountain1232
Blackford1193
Pulaski1131
Crawford1050
Brown1043
Parke962
Benton880
Ohio787
Union780
Switzerland690
Warren391
Unassigned0226

Ohio Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 148894

Reported Deaths: 4734
CountyConfirmedDeaths
Franklin26704607
Cuyahoga17375656
Hamilton13036315
Montgomery7755162
Lucas7280364
Butler5933111
Summit5265252
Marion308847
Mahoning3053281
Warren302349
Stark2838175
Pickaway264344
Lorain230786
Delaware223120
Fairfield208753
Columbiana192980
Licking191063
Trumbull1883132
Wood184172
Clark179440
Clermont170723
Lake161951
Medina146039
Greene144432
Allen143069
Miami142851
Portage113266
Mercer111918
Erie93546
Tuscarawas93020
Wayne92767
Ross87924
Richland86119
Madison81512
Darke79942
Belmont71827
Geauga71349
Hancock69510
Athens6692
Ashtabula65748
Lawrence65322
Shelby62510
Auglaize5979
Putnam58523
Sandusky56320
Huron5427
Union5292
Scioto4986
Seneca47014
Ottawa46830
Preble43315
Muskingum4012
Holmes3859
Jefferson3364
Henry31213
Logan3093
Champaign3043
Perry2969
Clinton29413
Defiance28911
Brown2882
Knox28415
Washington26023
Morrow2572
Hardin25213
Jackson2506
Fulton2411
Ashland2374
Crawford2366
Coshocton23411
Fayette2306
Highland2273
Wyandot21012
Williams2073
Gallia18913
Pike1840
Meigs17410
Guernsey1698
Hocking1639
Carroll1527
Adams1294
Van Wert1173
Monroe11018
Paulding1080
Harrison633
Morgan470
Vinton473
Noble280
Unassigned00
Fort Wayne
Few Clouds
70° wxIcon
Hi: 80° Lo: 62°
Feels Like: 70°
Angola
Clear
72° wxIcon
Hi: 80° Lo: 61°
Feels Like: 72°
Huntington
Overcast
65° wxIcon
Hi: 80° Lo: 62°
Feels Like: 65°
Decatur
Clear
73° wxIcon
Hi: 81° Lo: 62°
Feels Like: 73°
Van Wert
Clear
73° wxIcon
Hi: 81° Lo: 62°
Feels Like: 73°
Warm, Summer-Like Weekend
WFFT Radar
WFFT Temperatures
WFFT National

Community Events