Netflix’s blockbuster high yield issuance this week shows the love debt investors continue to have for the streaming service, but instead of adding to an already leveraged balance sheet, it should consider issuing new shares.
In the first three months of the year, Netflix paid $136m in interest, a staggering 30% of its $459m operating income.
It is now adding to this indebtedness by issuing $2.2bn of new bonds on Wednesday to pay for new content generation.
Instead of putting more pressure on its balance sheet, Netflix could have raised $2.2bn by selling primary equity which, given its $164bn valuation, would have only diluted its shareholders by around 1.3%.
Netflix’s shares trade at a P/E ratio of over 130 times earnings, so cutting this value by such a paltry amount would be more responsible than adding to its interest-bearing liabilities.
Equity investors that believe in a company's promises to transform the world can commit funds at levels that seem unmoored from cashflow-based reality. But debt investors can only expect par and the coupon, and have less patience with such dreaming.
It has had solid equity performance since the beginning of the year and is up almost 40% year to date. The company should have used the opportunity after this rally to take advantage of its stock’s impressive valuation while it had the chance.
Equity investors dislike dilution, but as has been shown in European ECM in 2019, they will often put aside discontentment when it supports growth.