Netflix (NFLX) announced plans this week to issue $1.5 billion of bonds that will reportedly yield 5.75% to 6% -- not much given the debt's "junk" status, but that doesn't necessarily make these bonds a bad deal.
Here's why I say that:
- I like the fact that these are a 10-1/2-year maturity bonds without a call. You can actually get paid to take risk. By contrast, the bonds of some other high equity-valuation companies with low credit ratings have had structures that left bondholders with too much downside risk relative to upside potential.
- Ratings agency Egan-Jones rates these new bonds at BBB-, while Moody's gives them a Ba3 and Standard & Poor's grades them at a measly B+ (although at least S&P says its outlook is positive). What if Egan-Jones is right?
- Netflix stock has risen from just $127 on Jan. 3, 2017, to $306.87 I write this (and that's after the stock has fallen some 5% since Friday). This gives Netflix around a $137 billion market cap. Now, I know that as a bond investor, it's difficult for me to even look at a stock price, especially for that of a high-flying name. But maybe the stock market has this one right and the ratings agencies are wrong.
If that's the case, then Netflix's new bonds could really perform over time.