Netflix Plans Heavy Borrowing to Fund Warner Bros Deal

There is a competitive in which Netflix is aiming to raise more funds by borrowing heavily for Warner Bros. Deal. 

Netflix, a firm that relied on junk bonds which can also be regarded as mortgage-backed securities, to build its business, is seeking to take on significant debt once more.

In order to finance its proposed $72 billion acquisition of the majority of Warner Bros. Discovery Inc., the streaming firm, formerly known as “Debtflix,” is aiming to add tens of billions of dollars in debt before it began to generate significant cash flow. However, Netflix Inc.’s better balance sheet than it had prior to the epidemic will likely enable the business to raise the amount it pays in any ensuing bidding war while maintaining investment grade.

“Netflix’s credit profile really turned around,” stated Stephen Flynn, a Bloomberg Intelligence telecom and media debt analyst. “From high yield, they’ve made significant progress.”

Wall Street banks have agreed to provide $59 billion in temporary loan financing for the company’s current acquisition. Eventually, the entertainment behemoth intends to replace it with up to $25 billion in bonds, $20 billion in term loans with delayed payments, and a $5 billion revolving credit line. Cash flow will likely be used to settle some as well.

With Paramount Skydance Corp. launching a hostile takeover attempt for all of Warner Bros. that values the firm at more than $108 billion including debt to be roughly $26 billion which is more than Netflix’s offer which may increase the company’s debt load even further. Both agreements might raise antitrust issues.

A group of Morgan Stanley analysts under the direction of David Hamburger believe that Netflix investors are currently at danger due to the company’s increasing debt levels. The analysts stated in a report on Monday that the streaming company, which has an A rating from S&P Global Ratings and an A3 rating from Moody’s Ratings, is at risk of being demoted to the BBB rung. They advise selling the company’s notes that are due in 2034 and 2054 because of the possibility that Netflix may take on significant new debt and witness a decline in its ratings.

Beyond downgrades, the corporation faces additional risks because it has to complete one of the biggest media mergers ever in its industry. In the event that regulators decide to block the deal, Netflix would be forced to pay a $5.8 billion penalty in the form of a breakup fee, if they are unable to acquire a new companies that would increase its earnings.

However, many investors and analysts believe that the risks are manageable. Over the past week, risk premiums on the company’s debt have barely changed. Moody’s upheld Netflix’s A3 rating on Monday, citing the company’s solid operational results and the advantages of acquiring “some of the most highly regarded intellectual property in the media industry,” such as DC Comics, HBO, and Harry Potter. The ratings agency’s “positive” outlook on the company was modified to “stable,” indicating a minor rise in risk resulting from the purchase.

Based on the most recent conditions of the deal, Netflix’s debt would increase from approximately $15 billion to over $75 billion, according to calculations made by Bloomberg Intelligence. However, despite having far more debt, the new business is anticipated to make around $20.4 billion in earnings before interest, taxes, depreciation, and amortisation next year, which will be used to pay interest.

Net debt at that level would be roughly 3.7 times Ebitda. Then, according to BI, earnings would likely increase in 2027, bringing the leverage ratio down to roughly the mid-2x range—a more normal level for an investment-grade company.

Flynn of BI stated that Netflix is a very, very strong credit overall. “The pro-forma company can de-lever quite quickly because they have growing free cash flow, growing Ebitda, and growing revenue.”

Netflix’s growing debt load is reminiscent of the company’s massive borrowing before to the epidemic, but there is one significant distinction: the streaming behemoth is now much stronger. In 2009, while it was shifting from primarily renting DVDs via the mail to being a streaming service, Netflix began selling junk bonds. Its debt load increased to $18.5 billion during the ensuing years as it began to produce hits like “House of Cards” and “Stranger Things” and acquired further rights to stream films and television shows.

As the corporation accumulated and swimming further into debt, some critics has nicknamed it “Debtflix.” However, its investments later shown to be prophetic. When the global epidemic struck in 2020, enormous sums of money poured into its coffers as individuals all around the world were confined to their homes under lockdown and in need of entertainment. Netflix has a backlog of films and television shows that turned out to be far more valuable than the business had anticipated.

The corporation began producing more than $6.9 billion in free cash flow annually in 2023. At a time when it required less debt capital, bond raters have elevated it to investment-grade classification, enabling it to finance itself at a lower cost.

Jim Fitzpatrick, Allspring Global’s head of US investment-grade credit research stated that Netflix has earned the right to undertake an acquisition of this magnitude. He went on to say even if they have to increase their bid, their balance sheet has plenty of room to accommodate something like this.

And with this rival and hostile acquisition attempt from Paramount-Skydance, valued at more than $108 billion including debt, complicates the funding environment. Netflix’s current deal does not cover the complete Warner Bros. Discovery organisation, including its cable television channels. Netflix might be compelled by this rivalry to raise its bid and assume even more power.