Netflix gains improved rating form S&P on strong outlook

Netflix's high-yield bonds moved ahead on Thursday evening, after S&P Global Ratings revised its outlook on the Californian firm's credit, saying that a stronger-than-expected operating performance in 2017 had forced it to take another look.

S&P said Netflix would "continue to demonstrate significant strength as the leading streaming video on demand (SVOD) service despite increasing competition," as the investment bank revised its outlook on the group's debt rating to 'positive' from 'stable' and reaffirmed its B-plus rating overall.

S&P analyst Jawad Hussain said Netflix's ability to boost subscriber growth and its EBITDA expansion in 2017, coming after it chose to raise prices led S&P to expect it to continue its heavy investment into original content in order to retain its subscriber base, with the firm already announcing it will spend $8bn on content and another $2bn on marketing, potentially setting itself up for further price hikes in the future.

If Netflix was capable of increasing EBITDA margins by 300 basis points throughout the year, S&P would consider a further rating upgrade as a margin expansion of that level could potentially spike subscriber growth and somewhat subdue competition in the video-on-demand market.

"We could revise the outlook to stable if the company is unable to continue to grow EBITDA margin considerably in 2018," said the Hussain.

"This could result from a slowdown in subscriber growth and reduced operating leverage if content and marketing investments are less effective at retaining subscribers," he added.

Netflix, which has no advertising and relies solely on subscriptions and licensing for its revenue, was expected to see its investment plans for 2018 lead to a negative free cash flow of between $3bn and $4bn.

The media giant's most-active bonds, the 4.875% notes set to mature in April 2028, were trading at 98.406 cents on the dollar to yield 5.077% on Thursday, about 15 basis points tighter than they had been last Friday.

As of 1440 GMT, shares had gained 0.78% in pre-market trading to $280.30 each.