Apple, Netflix plan corporate bond sales to raise funds

Mike Snider | USA TODAY

Tech giants Apple and Netflix plan corporate bond offerings of $6.5 billion and $1.5 billion, respectively, as a quick way to raise capital for share buybacks and other expenses.

With global interest rates so low, the two companies can use the bond offerings to raise funds relatively cheaply, rather than spend cash on hand.

Shares of both companies fell about 1.5% when the market opened. But both stocks largely recovered by the close, with Apple up 1.3% at $118.63 and Netflix ended at $441.07, off 0.2%.

Apple (APPL) has $178 billion in cash and just two years ago sold $17 billion in what was then the largest corporate bond sale in history. It was surpassed later in 2013 by Verizon's $49 billion bond offering. Overall, Apple has issued $32.5 billion of bonds in three offerings since April 2013, according to Bloomberg.

Netflix (NFLX), however, finished the fourth quarter with $1.6 billion in cash on hand. CEO Reed Hastings, in the company's recent fourth-quarter earnings note to shareholders, said the streaming video provider would seek to raise funds to help pay for the growing costs of creating original content.

"Given we are investing faster in content (this Q1 will show a step up in cash use with all the original projects launching in the quarter) and the current favorable interest rate environment, we intend to raise at least a billion dollars, pending market conditions, of additional long-term debt in a similar manner to last year," he said.

"As long as the maturities are spread out, and the interest cost is built into our content budgets, we think long-term debt is the best way for Netflix to finance the production of content," Hastings said.

Netflix plans to launch 320 hours of new and returning original series such as House of Cards and Orange is the New Black, plus films including a sequel to Crouching Tiger, Hidden Dragon on Aug. 28, documentaries and stand-up comedy specials.

Investors will likely flock to the bonds, considering their yields are expected to outpace current Treasury rates, said Stan Richelson, founder of Scarsdale Investment Group in Blue Bell, Pa.. "A company like Apple will be able to sell as much as they put out. No trouble," he said.

Apple's planned issue of $2 billion 30-year notes would carry a yield above similarly-dated Treasury bonds of 125 basis points, according to Bloomberg, and its five-year notes would also yield more than comparable Treasuries. Apple initially planned to issue about $5 billion worth of bonds, then upped the total later in the day.

Beyond share repurchases and increased dividends, the bigger question is what are they going to do with all that money?" said Marilyn Cohen, president of Envision Capital Management. "I don't know, but they have got plenty of cash on their balance sheet, so they have got to think that things are still unbelievably cheap."

But Wall Street did make public some doubts about Netflix's strength, lowering its rating further into junk levels and issuing a "negative outlook." Standard & Poor's cut Netflix's corporate credit rating from 'BB-' to 'B+' and gave the same 'B+' rating to the proposed bonds and its existing senior unsecured notes.

"The downgrade and negative outlook reflects our expectation that Netflix will incur significant discretionary cash flow deficits over the next several years and that debt leverage will be high during that time," the firm said.

Having previously downgraded Netflix's corporate rating to "B1" from "Ba3" on Jan. 22, after Hastings announced expectations of a future bond sale, Moody's rated the proposed bonds at "B1" also.

Because Netflix is riskier and will have to pay higher interest rates than Apple, Richelson said, "it will yield more and probably be more desirable."

Follow Mike Snider on Twitter: @MikeSnider