Netflix plans to raise a large amount of debt again to fund the acquisition of Warner Bros. Discovery

Once dubbed "Debtflix" due to its towering debts, the streaming giant Netflix is now planning to take on massive debt to acquire Warner Bros. Discovery. Despite the addition of several billion dollars in debt, analysts believe its credit status has improved significantly.

According to the current acquisition agreement, Netflix has secured a $59 billion unsecured bridge loan from Wall Street banks, with Wells Fargo committing to provide $29.5 billion, the largest share ever offered by a single bank in investment-grade bridge loans.

Currently, Wall Street is looking to earn hefty fees from the long-awaited merger and acquisition revival. However, such temporary financing loans are typically replaced by longer-term debt.

Netflix plans to ultimately replace this with up to $25 billion in bonds, $20 billion in delayed draw term loans, and a $5 billion revolving credit facility, with some funds also being repaid in cash.

However, the outlook for the deal has changed. Wall Street Journal mentions that Paramount has made a cash offer equivalent to $108 billion, which is about $26 billion higher than Netflix's bid. This could force Netflix to raise its offer further in a potential bidding war and increase its debt load.

Despite Morgan Stanley analysts warning that the surge in debt poses risks, S&P Global Ratings maintains Netflix's A rating, although it may face a downgrade to BBB. Most analysts, however, believe the risks are manageable.

Leverage Remains Within Manageable Range

According to estimates from Bloomberg Industry Research, if Netflix's acquisition deal is completed under the latest terms, it is expected to generate about $20.4 billion in EBITDA next year.

At that time, the net debt to EBITDA ratio is expected to be around 3.7 times, which could drop to just over 2 times by 2027, a level considered normal for investment-grade companies. Stephen Flynn, a debt analyst for telecom and media at Bloomberg Industry Research, stated:

Overall, Netflix's credit rating is very, very high. They have growing revenues, EBITDA, and ample cash flow, so the combined company will be able to reduce leverage quite quickly.

Jim Fitzpatrick, head of U.S. investment-grade credit research at Allspring Global, stated:

Netflix is qualified to make such a large acquisition. Their balance sheet has enough capacity to handle such transactions, even if they need to raise their bid.

Facing Risk of Rating Downgrade

However, the Morgan Stanley analyst team pointed out in a report on Monday that the rising debt levels pose risks to Netflix investors, and the company may be downgraded to BBB.

Analysts recommend selling the company's bonds maturing in 2034 and 2054, citing that Netflix may issue a large amount of new debt and face a rating downgrade.

In addition to the risk of a downgrade, the company faces other risks: It must complete one of the largest media deals in history. U.S. regulators may take antitrust scrutiny, forcing Netflix to pay a $5.8 billion breakup fee without being able to acquire new businesses that could boost revenue.

In addition, Paramount has thrown out a $108 billion all-cash proposal with a hostile takeover posture, which not only offers a more attractive price but also benefits from its long-standing friendly relationship with the Trump team, giving it a natural advantage under the new government regulatory framework.

The balance sheet has changed dramatically

Netflix's financial situation is vastly different from the time it heavily leveraged itself before the pandemic. Flynn stated:

Netflix's credit situation has indeed changed. They have gotten rid of the high-yield bond predicament.

The streaming company first issued junk bonds in 2009 while transitioning from a DVD rental business to a streaming service. In the following years, its debt burden once climbed to $18.5 billion, used to acquire streaming rights for films and TV shows and produce popular series like "House of Cards" and "Stranger Things."

After the global pandemic outbreak in 2020, the homebound audience brought a significant cash flow to Netflix, and the value of its content library exceeded expectations.

By 2023, Netflix's annual free cash flow has surpassed $6.9 billion. Rating agencies have upgraded it to investment grade, allowing it to finance at lower costs. S&P Global Ratings currently gives the company an A rating, while Moody's rates it at A3