Fickle Muse

Netflix Bonds Backed by Whim of Creativity

Investors flock to finance a company that relies on the rare feat of churning out hit shows.
Photographer: Frederick M. Brown/Getty Images
At Closing, March 19th
313.48 USD

Netflix Inc. is selling bonds again, which should not come as a surprise. The internet subscription service has few other options to pay the estimated $11.5 billion bill next year for its streaming entertainment programming. The company doesn't make money; it's burning through cash and doesn't expect to break even for a long time.

But what is surprising is that debt investors are so willing to jump on board. They're financing a company that needs one hit show after another in a notoriously fickle industry to thrive into the next decade. And bond buyers are accepting materially lower yields on Netflix debt than comparably rated borrowers.  

Below Market

Netflix is borrowing money more cheaply than comparably rated companies

Source: Bloomberg, Finra's Trace bond-price reporting system, BofAML index data

Netflix is rated B1 by Moody's Investors Service and B+ by S&P Global

Netflix said on Monday that it planned to sell $1.6 billion more debt, with proceeds going toward "general corporate purposes." Bloomberg Intelligence analyst Stephen Flynn estimates Netflix may sell up to $1.4 billion in additional bonds over the next 12 months. Netflix has been clear that it will continue to sell debt so it can keep pouring money into new shows, with its programming expenditures growing a shade faster than revenue in the last couple of years. 

Bills, Bills, Bills

Netflix's cash costs for streaming programming has doubled in two years. The spending has increased more quickly than revenue.

Source: Bloomberg and Bloomberg Intelligence (for Q4 2017 estimates)

Note: Figures for the cash cost of streaming programming are calculated from Netflix's cash-flow statement as the additions to streaming content assets plus the change in streaming content liabilities.

The hope is that Netflix will become home to must-watch shows that draw in tens of millions of new subscribers around the world. Netflix continues to add customers rapidly, and it has defied long-standing expectations that its appeal will fade.

Still, it's far from certain that Netflix can keep up its track record of subscriber growth and savvy entertainment choices. Every month, the company will need to give subscribers reasons to keep paying their Netflix bills at a time of escalating competition. Every entertainment company is trying to become more like Netflix as viewers gravitate to web-streaming entertainment. 

Yet investors don't seem worried that Netflix can pull this off. In fact, they can't seem to get enough of the company's bonds. Netflix has roughly doubled its long-term debt since 2014, to about $5 billion.  

Deeper In Debt

Netflix has more than doubled its long-term debt over the past few years

Source: Bloomberg, corporate filings

It's important to realize that this company's entire business model relies on a very compliant debt market. Understandably, stock investors like the Netflix strategy because the more the company borrows, the more upside they have. But bond investors are taking on more and more risk without that same upside.

In fairness, this is a hard time for investors to truly assess risk. Almost all markets look historically expensive on the heels of central bank policies that have suppressed borrowing costs for years. But Netflix is uniquely worrisome. It's another example of how bond investors are assuming big equity-like risks without the potential upside.

To the Moon

Netflix shares have doubled in two years, and debt investors have helped generate those stock gains

Source: Bloomberg

Investors will inevitably snap up Netflix's latest bond sale and the others likely to follow with gusto. But they should pause to consider whether the company's reliance on a hit-factory business model merits such enthusiasm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Lisa Abramowicz in New York at
    Shira Ovide in New York at

    To contact the editor responsible for this story:
    Daniel Niemi at

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