What Junk-Rated Netflix just Said about the Bond Market, by Wolf Richter

When the stock market finally gives up the ghost, sell Netflix first, because heavily indebted stock market darlings are the first companies that are taken out and shot. From Wolf Richter at wolfstreet.com:

It lives in a fantasy world.

Netflix just completed a $1.6 billion junk-bond offering. The 10.5-year notes are rated B+ by Standard & Poor’s and B1 by Moody’s – four notches into junk. But no problem. Those notes sold on Monday at a yield of 4.875%, or 256 basis points over the equivalent US Treasury yield, according to LCD of S&P Global Market Intelligence.

This was just the latest – and largest – issuance in a series of ever larger bond sales.

Netflix, whose shares went from $9.94 to $192.47 in five years, is on a peculiar and accelerating treadmill: It needs to borrow ever larger amounts just to cover its ever-larger negative cash flows year after year. These negative cash flows are mostly caused by ever more spending on its proprietary streaming entertainment programming that is needed to attract ever more subscribers, who are needed to support its gigantic market capitalization of $84 billion. And that gigantic stock market capitalization is needed as a guarantee of sorts for the bondholders…. If this seems a bit circular, it’s because it is.

You’d think a company that has been publicly traded for 15 years, offers a popular service, and produces proprietary content that people want to watch would have figured out by now how to turn its business model into something that is self-sustaining. But no.

Cash flow from operations is becoming increasingly negative:

  • 2015 full year: -$0.75 billion
  • 2016 full year: -$1.47 billion
  • 2017 Q1 – Q3: -$1.30 billion

So why can’t it find a self-sustaining business model? Because it doesn’t have to. It can always borrow the money instead of making it. That’s the logic. The bond sale on Monday came on top of a long series of bond sales.

To continue reading: What Junk-Rated Netflix just Said about the Bond Market


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