Netflix Inc.'s sizable stack of senior unsecured bonds advanced en masse today after S&P Global Ratings delivered an investment-grade upgrade to BBB, from BB+, with a stable outlook, citing improving margins and positive cash flow expectations. Market participants had not expected the move to come before the end of the year.
Ratings analysts noted that Netflix has managed to moderate its content spending while continuing to scale and build its content library. The agency now expects Netflix to become — and remain — cash-flow positive starting in 2022.
"This pivot to a more mature and cash generative business (with increasing operating margins and cash flow), coupled with its strong brand and global [over-the-top] leadership position, distinguish it from most of its peers that are still in the early stages of building their own scaled OTT services," analyst Jawad Hussain wrote in today's upgrade report.
Netflix has been eyeing investment-grade status since April 15, when Moody's delivered a two-notch upgrade to Ba1, from Ba3, with a positive outlook on subscriber growth and improved operating margins. NFLX bonds have traded at investment-grade prices since early 2020 at least, to the extent that a consensus-beating bounce in third-quarter profit and subscriber numbers on Oct. 19 produced negligible price action. Today, the actively traded $1 billion issue of 4.875% 2030 bonds garnered a point on the day, to change hands at 118 for a yield of about 2.476%, or T+84. The biggest gains came in the 5.875% senior unsecured notes due 2028, which were up 1.25 points, at 122.25, for a yield of around 2.23%, or T+79.
Netflix has $15.6 billion of senior unsecured bonds outstanding, including $700 million of 5.5% notes maturing in February 2022. Capital expenditure is expected to come in at about $625 million in 2022 and about $725 million in 2023. The company recently reported its strongest subscription growth of this year, with 4.4 million subscribers added in the third quarter where analysts had been anticipating 3.72 million, with the company attributing the boom to the popularity of its show "Squid Game." The company expects to add another 8.5 million subscribers in the final three months of 2021. Ratings is projecting 2021 net adds of about 18 million, which compares with 37 million in 2020.
