Morgan Stanley: "Possible Downgrade from A to BBB"
Moody's Maintains A3 Rating
Netflix is facing the risk of a credit rating downgrade as it borrows 86 trillion won to finance its acquisition of Warner Bros.
According to a report from Morgan Stanley cited by Bloomberg News on December 10 (local time), Netflix plans to raise $59 billion (approximately 86.5 trillion won) in temporary debt from Wall Street banks. On December 5, Netflix agreed to acquire Warner Bros.' film and TV studios, as well as the streaming service HBO Max, for $72 billion (about 105.6 trillion won).
The Morgan Stanley analysis team pointed out that the increase in debt poses a risk for investors and predicted that Netflix’s A rating from credit rating agency S&P Global could be downgraded to BBB.
Bloomberg estimated that, once the acquisition is completed, Netflix’s debt will increase fivefold from the current $15 billion to $75 billion. However, the report also noted that after the merger, the company is expected to generate around $20.4 billion in EBITDA next year, which should be sufficient to cover its interest payments.
Bloomberg analyzed, "Once dubbed 'Debtflix' due to its ballooning debt from large-scale investments, the company is now generating massive cash flow."
Credit rating agency Moody’s maintained Netflix’s A3 rating on December 8, citing the benefit of acquiring "some of the most highly rated intellectual property in the media industry." However, reflecting a slight increase in credit risk, Moody’s changed its outlook from "positive" to "stable."
Bloomberg reported that while Netflix’s net debt is about 3.7 times its EBITDA, increased earnings in 2027 are expected to bring the leverage ratio down to the mid-2x range.
However, as Paramount Skydance has made a hostile takeover bid for all of Warner Bros., valuing the company at over $108 billion including debt, Bloomberg pointed out that Netflix’s debt burden could increase further in the future. If Netflix fails to secure regulatory approval, it will be required to pay Warner Bros. a breakup fee of $5.8 billion (about 8.5 trillion won).
Jim Fitzpatrick, Head of Credit Research at asset management firm Allspring Global, stated, "Netflix is qualified to handle an acquisition of this scale," and added, "Even if the company needs to raise its bid, its financial statements show sufficient capacity to absorb it."
Investor anxiety has been reflected in the share price. Netflix shares have continued to decline since closing at $103.22 on December 4, falling 10.2% over four trading days to close at $92.71 on December 10.
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