American entertainment company Netflix Inc plans to raise $1.9 billion in a junk-bond offering as it looks to drive subscriber growth through original content. This is the company’s biggest round of debt financing to date.
Initially, Netflix announced it will issue $1.5 billion in debt, however, by Monday evening the video streaming pioneer company revised its plans to $1.9 billion. This additional debt caused a reaction from investors and made the company’s shares close 2.8 percent at to $318.69 per share.
Netflix has decided to turn to debt to finance its content binge-spending. “We believe the debt is lower cost of capital compared to equity,” the company said in a letter to shareholders.
In the first quarter of 2018, Netflix reported a long-term debt of $6.5 billion, while it looks forward to a negative free cash flow in the second half of the year. Netflix announced earlier this month that it plans to spend nearly $8 billion on content in 2018.
According to the company’s latest quarterly report, the American based entertainment company had around $2.6 billion in cash/equivalents in the first quarter of 2018 and as at March 31, Netflix had $6.54 billion in long-term debt and $17.9 billion in streaming content payment obligations (of which $3.44 billion are long-term content payment obligations).
As Netflix assumes more debt load its interest expenses rises. Early this year the company’s interest expense was $81.2 million, up 74% from $46.7 million in the first quarter of 2017.
Meanwhile, Netflix said that this latest debt offering of 5.875 percent senior notes, which is expected to mature 15th November 2028 will close on the 26th of April, and the company will begin paying interest on the notes in cash semi-annually starting from 15th November 2018.
Netflix intends to use the net proceeds from the offering for general corporate purposes, which may include content acquisitions and production.