Netflix Inc. is planning to issue $2.0 billion of 10.5 year junk bonds later Tuesday in a two-part deal that includes a euro-denominated tranche, as it continues to raise the funds needed to produce its original content.
The company NFLX, -1.56% will likely benefit from positive sentiment stemming from last week’s strong third-quarter earnings beat and a recent credit upgrade from S&PGlobal, as it taps the capital markets for the second time this year, according to CreditSights analysts.
Initial price talk is for a 6.25% yield on the dollar notes and 4.625% on the euro notes. The euro note pricing is more attractive, even if it were to tighten by 40 basis points to 50 basis points from initial price talk, analysts Lindsay Gibbons and Jay Mayers wrote in commentary.
As far as the dollar tranche goes, “While we see a 6.25% yield as attractive given Netflix’s ratings and equity cushion, concessions (about 20 basis points) have compressed meaningfully compared with previous deals (about 50 basis points in April),” they wrote. “We would be buyers of the new USD tranche should it price in line with initial price talk, but would remain neutral if it were to price higher.”
CreditSights is positive on the Netflix story and views it as a core dollar high-yield holding, but investors should be compensated for the risk they are taking on given the company’s free cash flow burn, which is expected to come to about $3.0 billion in 2019.
Still, the company is coming to a high-yield market that has seen issuance decline 33% from a year ago, and that supply shortage combined with a well-known name should spur demand, said the analysts.
Read now: Netflix is still the favorite streaming service for teen viewers, survey finds
Don’t miss: Netflix is ditching freeloaders from subscriber forecasts after volatile stock moves
The deal marks the first time that Netflix has tapped the euro market since April of 2017.
CreditSights is expecting the company’s gross debt to climb to about $10.4 billion once the deal is complete. Assuming that it uses proceeds of the deal to cover negative free cash flow, it will end the year with pro forma cash of about $3.8 billion and a net debt balance of $6.6 billion.
That will raise its pro forma 2018 estimated net leverage to about 3.3 times, about 6 ticks higher than the end of the third quarter.
See also: Is Netflix stock falling down a mountain, or just tripping over a molehill?
Related: Netflix’s junk bonds were also hammered by its weaker-than-expected numbers
Bookrunners on the deal include Morgan Stanley, Goldman Sachs, JPMorgan, Deutsche Bank and Wells Fargo.
Spreads on Netflix’s most active bonds, the 5.500% notes that mature in February of 2022, were 18 basis points wider on Tuesday at 176 basis points over comparable Treasurys, according to trading platform MarketAxess.
The company’s 4.875% notes that mature in April of 2028, were trading at 286 basis points over Treasurys, about 5 basis points wider on the day, according to MarketAxess.
Netflix stock, meanwhile, was down 2.3%, but has gained 68% in 2018, while the S*P 500 SPX, -1.53% has gained 1.2%.
Read also: These are the DVDs that kept the post office busiest in each of Netflix’s first 20 years
