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Netflix’s debut European bond sale draws heavy demand

Netflix saw a flood of demand for a €1.3bn bond sale on Wednesday, as supply-starved junk debt investors put aside concerns around the US streaming service’s substantial cash burn to get a piece of its debut euro deal.

The sub investment-grade rated company announced the deal on Monday as a €1bn 10-year bond to help fund its international expansion and planned shift to developing more original content.

Netflix then increased the size of the deal to €1.3bn on the back of strong demand on Wednesday, with one investor who bought the bond told that the deal had drawn more than €5bn of orders by midday.

The deluge of orders came despite Netflix’s substantial cash burn, overturning the received wisdom that junk-rated borrowers need to demonstrate they can generate enough cash to service their debt.

Netflix, whose shares touched a record high on Tuesday, burnt through more than US$1.8bn of free cash flow in the 12 months ending on March 31, according to the bond’s offering memorandum.

“The amount they are spending on content is accelerating and they’re going to be burning cash for the next few years,” said Mark Wade, a senior partner at Rogge Global Partners. “And it’s all going to be financed by debt — they’re going to be doing a big benchmark bond at this time of year regularly to fund that.”

Netflix has already raised $3.4bn of bond finance in the US high-yield market.

The new euro bond deal also lacks key protections that investors usually demand to lend to riskier borrowers. The bond’s terms contain no debt incurrence covenants, which prevent companies from raising more debt than investors think is sustainable.

These covenants are usually a standard feature for Single B rated bonds — with Moody’s and S&P rating Netflix’s deal B1 and B+, respectively.

Investors buying the deal will look to the US-listed company’s more than $65bn market cap for comfort, however, while yields on offer look generous compared with Netflix’s $1bn note yielding 4.5 per cent that has a narrower spread over the relevant sovereign benchmark.

The company began marketing the euro bond at 3.75 per cent to 4 per cent yields on Wednesday, before pricing at 3.625 per cent.

While this will hand Netflix its lowest ever coupon on a public debt raise, analysts at research firm CreditSights said in a Monday report titled Buy Netflix and Chill that they thought that the bond would outperform, even if pricing came as tight as 3.25 per cent.

Mr Wade also said the yields that the deal was initially marketed at were “more generous than expected”, adding that the deal was likely to perform well in the secondary market.

“While it is Single B, the market cap means many guys will view it as Double B, and you’ll get investment grade crossover guys dipping down to buy,” he said.

“Also, given the post French election euphoria, people want to get some duration and a 10-year non-call life bond certainly offers duration.”

High-yield bonds typically have embedded call options, which allow the borrower to repay them ahead of maturity at a lower than usual cost. In contrast, the Netflix deal’s “non-call life” structure offers investors more upside in the form of price appreciation if the company does well.

One high-yield fund manager said that while he had placed an order for the deal given the generous yields, he was particularly concerned that any potential equity market volatility could filter through to bond prices.

“There’s a really high chance you come in one day and find the stock down 30 per cent because this is an increasingly competitive space with big beasts such as Amazon and Google getting involved,” he said. “But unfortunately, the bond offers a 90 to 100 basis point spread discount to the dollar notes, and that’s very hard to turn down.”

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