Netflix is racking up another $1.6B in debt, but Moody's says it's sustainable

Netflix corporate headquarters
Moody’s said Netflix's strategy to produce and own its own content has positive long-term implications including scale benefits for the company, proprietary value to consumers, and a valuable asset base.

Netflix’s original content budget continues to swell—it could go as high as $8 billion next year—and as a result the company is taking on more debt to continue funding its expenditures.

The company this week announced that it will issue $1.6 billion in senior notes.

“Netflix intends to use the net proceeds from this offering for general corporate purposes, which may include content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions,” the company said in an SEC filing (PDF).

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Credit rating agency Moody’s took notice of Netflix’s plans and slapped a B1 rating on the notes, which are due to mature in 2028. The firm noted that the proposed issuance will push Netflix’s pro forma leverage back up to 8.0x, up from 6.2x for the last 12-month period, which ended Sept. 30, 2017. The revised figure exceeds the sustained leverage threshold for the B1 rating.

“However, despite the continuing issuances of debt to fund the company's negative cash flows, we expect leverage to drop over time as the transition from licensed content to produced original content levels off and newer international markets begin to contribute to profits and margins improve overall,” wrote Moody’s. “We anticipate that leverage will fall back to around 6x by the end of 2018 as the company's EBITDA growth outpaces the growth in debt.”

Moody’s said Netflix's strategy to produce and own its own content has positive long-term implications including scale benefits for the company, proprietary value to consumers, and a valuable asset base.

“With distribution reaching across the entire world, Netflix has the capability to create content at a fixed cost and scale it across a near global footprint,” Moody’s wrote.

The new debt announcement comes after Netflix last week produced its latest quarterly earnings report and revealed that it had added 5.3 million new subscribers—4.45 million new international subscribers and 850,000 new domestic subscribers.

Netflix also reported an increase in global streaming revenue, up 33% year over year. The company attributed the rise to a 24% increase in average paid memberships and 7% growth in average subscription prices. Operating income rose to $209 million, nearly doubling year over year, and net income came in at $130 million.

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