If you are like us at Orca, you probably binge watch a lot of Netflix, from House of Cards to Friends, there is pretty much always something binge worthy to watch on Netflix. So when you read the headlines “Netflix has over 3 billion in debt” or “Netflix has a 800 million debt offering” how is this possible for a company that we are all obsessed with and seems like it is doing well to be taking on so much debt?
Companies that are growing and need capital can access it via debt markets (bond) or equity markets (issuing stock). When interest rates are low and company projected growth rates are high (expect stock price to go higher). Companies do not want to dilute their EPS (earnings per share) by issuing more stock. In these circumstances its better for the company to borrow at low interest rates to propel growth.
Netflix is in debt, that is true, but it is “good” debt, Netflix has been issuing bonds to raise capital that they can use to grow. They have enough cash on hand to cover their over 3 billion dollars of debt but choose to continue to raise money, as interest rates are low. This is why Netflix has “good” debt as they are being cost effective by growing their business by using low cost loans, and Netflix has enough money to pay off their loans if needed, as their CEO Reed Hastings stated “It is like having a million dollar house and having $50K of debt on it”. Which as you can figure is not a big deal, so how are they raising the 800 million, well with senior notes.
Senior Notes
Are a type of bond or debt security; it is called senior because it must be paid first in the event of a liquidation over unsecured notes, the order would go senior debt, senior notes, and then unsecured notes. They also tend to have shorter years to maturity (when the bond principal is paid out) this is usually less than 10 years. Finally they pay a lower coupon (interest rate) as they offer the security of getting your money back before unsecured debt holders. No one truly knows what the rates and years will be for the this round of 800 million but Netflix’s past debts have been around 5.8% and under 10 years.
Why raise money?
Netflix has a huge amount of growth plans to create original content, and continue to grow relationships with other 3rd party networks for content. This is a huge undertaking and will be costly, but Netflix has shown solid growth this past quarter and is looking to take over the premium streaming content group. Only time will tell.
So have no fear, Netflix looks like it will be around for a while, so binge away my friends and keep an eye out for new content.
