What's Up With Netflix, Inc. Borrowing Another $400 Million?


Image source: Netflix.

In its recent fourth-quarter earnings report, Netflix said it would raise another $400 million of long-term debt: "Given the current favorable interest rate environment, we think a prudent step in Q1 is to raise an additional $400 million of long-term debt on terms similar to our $500 million raise last year. At $900 million of total long term debt, we will have an extremely modest debt to equity ratio."

Expanding on the thinking behind this move, CFO David Wells explained:

We don't think that we'll need the money this year or next year. We may not need it at all. But given our expansion plans with international and given our content expansion, which tends to run a little bit ahead on cash, we think the current interest rate environment is pretty attractive. So we're going to add to the balance sheet.

So that's the plan. Why wait? In short order, Netflix formally announced its intention to sell $400 million of senior debt notes, then tapped Morgan Stanley to run the bond sale. The bank set the terms of the loan to 5.75% interest under a 10-year term, benchmarked against 10-year Treasury notes.

Morgan Stanley will also initially own half of the new bonds, with the rest spread across three major investment firms. All four banks can sit on their Netflix bonds or resell them for profit.

This structure is nearly identical to the $500 million bond sale Netflix ran last year.

NFLX Non-Current Portion of Long Term Debt (Quarterly) Chart
NFLX Non-Current Portion of Long Term Debt (Quarterly) Chart

NFLX Non-Current Portion of Long-Term Debt (Quarterly) data by YCharts.

The $400 million of new funds is not officially earmarked for anything in particular. "Netflix intends to use the net proceeds from this offering for general corporate purposes, including capital expenditures, investments, working capital and potential acquisitions and strategic transactions," the announcement says -- standard boilerplate stuff that doesn't tie Netflix down to any particular use of the money.

That said, Netflix has said that international growth largely gets funded out of the profits from domestic DVD and streaming services. With that in mind, this $400 million cash injection seems to be the start of an even larger original content push, on top of the severalnewshows already lined up for a 2014 release.

That's Netflix's capital strategy in a nutshell: Grow international markets as fast as your internal profits will allow, and bet on original productions with borrowed money -- as long as interest rates stay low, anyhow.

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The article What's Up With Netflix, Inc. Borrowing Another $400 Million? originally appeared on Fool.com.

Anders Bylund owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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