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Netflix to Seek $400 Million in New Bond Debt

3 Feb, 2014 By: Erik Gruenwedel

Funding would nearly double to $900 million the subscription streaming pioneer owes in long-term debt, which doesn’t include third-party content licensing.

Netflix plans to obtain $400 million in new long-term debt (bonds) in the current first quarter (which ends March 31), according to a Feb. 3 regulatory filing. The subscription streaming pioneer ended 2013 with $500 million in 5.375% senior notes on the balance sheet —excluding about $3.5 billion in content liabilities and other long-term debt.

Netflix added it could incur additional indebtedness in the future “in the ordinary course of business,” which likely includes third-party content license agreements and original programing.

The new bonds would nearly double to $900 million Netflix’s long-term indebtedness, which could raise concern regarding the SVOD’s debt-to-equity ratio. That’s because Netflix ended 2013 with about $4 billion in total liabilities and $1.3 billion in shareholder equity, which works out to a debt-to-equity ratio of 3.06. 

A debt-to-equity ratio of 1.00 means that half of a company’s assets are financed by debt and the other half by shareholders. A higher debt-to-equity ratio means more of a company’s assets are financed by third-party debt than by shareholders’ investment.

An increasing debt-to-equity ratio could be a concern because it means that the percentage of assets of a business that are financed by the debt is increasing, but Netflix has the advantage of a high stock valuation. The stock opened Feb. 3 at $411 per share.

“Their retained earnings are low, but their equity value is high,” said Michael Pachter, analyst with Wedbush Securities in Los Angeles. “They aren’t at risk so long as their share price is this high. If their shares dropped back to below $80, it would be a problem.”

Indeed, Pachter — a long-time Netflix bear — reiterated that the company’s debt doesn’t include content commitments, which keeps escalating as it attempts to nail down exclusive programming and thwart competition.

“That’s one of the issues with them that everyone overlooks,” he said.

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