The world's largest online television network sold $1.9 billionof senior bonds in its largest-ever dollar-denominated offering.That was up from a planned $1.5 billion, according to a statementMonday. The 10.5-year notes yield 5.875 percent, within theinitially discussed range of 5.75 percent to 6 percent, accordingto people with knowledge of the matter, who asked not to beidentified because the details are private.

Netflix's sale follows a quarter in which it added 7.41 millionsubscribers, its strongest start to a year since going public 16years ago. Moody's Investors Service upgraded the company's creditratings earlier this month, citing expectations that growth willcontinue and eventually turn its cash flows positive. In an April13 report, Bloomberg Intelligence analyst Stephen Flynn said theupgrade may give Netflix the support to sell $2 billion of bonds toboost liquidity and pay for rising programming costs.

Even with a better credit rating, Netflix is still a junk-ratedissuer whose operations continue to burn through cash. That hasn'tseemed to bother debt investors too much, who have proven willing,time and time again, to lend to the company as it invests inprogramming to fuel subscriber growth, according to Rahim Shad, asenior analyst in high-yield credit research at Invesco Ltd.

“Of course there's the massive cash burn; just ignore that for asecond. The rest of the story is doing something that's quiteunique—subscriber growth and ASP growth,” Shad said, referring toaverage selling price. “Netflix is essentially in its own league.”He was speaking before the bonds were sold.

A representative for Netflix didn't return a call seekingcomment.

S&P Global Ratings graded the bonds B+, four steps belowinvestment grade. As Netflix continues to invest, free cash flowdeficits should surpass $3 billion in 2018, S&P said.

The proceeds of the offering will be used for general corporatepurposes, which may include adding content, production, anddevelopment as well as potential acquisitions, the Los Gatos,California-based company said in its statement. In this case, oncesold, the bonds can't be bought back by Netflix.

Not all investors were interested in the sale. With a maturityof 10.5 years, the bonds are heavily exposed to further rises ininterest rates, said John McClain, a portfolio manager at DiamondHill Capital Management. An 8-year security with similar initialprice talk would have been more attractive, he said, speakingbefore the notes had been sold.

“There will be a better entry point into this,” possibly closerto when the 10-year Treasury nears 3.25 percent, McClain said.“Netflix can't control where interest-rate expectations are, butthey waited until they printed a good quarter and that was theright thing to do.”

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'Thick Cushion'

With a stock market value of around $140 billion and thebest-performing stock in the S&P 500 this year, Netflix hasoften touted its “thick” equity cushion as reason to buy its debt.It's historically borrowed to invest in original content and plansto continue to do so, according to a statement to shareholders lastweek. Debt financing is cheaper than equity, it said.

Netflix had $6.5 billion of long-term debt as of March 31, $1.6billion of which came from its largest-ever dollar-denominated salein October. Its debt was 7.4 times EBITDA (earnings beforeinterest, tax, depreciation, and amortization), according toMoody's, which uses adjusted figures for the 12 months ended March31. It should drop to “comfortably” under 5 times EBITDA by the endof 2020 as Netflix continues to boost subscribers and revenue,Moody's analyst Neil Begley said in an April 11 report.

Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase &Co., Deutsche Bank AG, and Wells Fargo & Co. managed the sale,one of the people said.

From: Bloomberg

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