Days after Netflix’s strong earnings report, rating agency S&P has upgraded the company to BB+, just one notch below investment grade with a positive outlook. S&P cited Netflix’s significantly improved free operating cash flow (FOCF) trajectory and the likelihood that the company will generate sustained positive FOCF beginning in 2021 as reasons for the upgrade. The positive outlook is based on a possible rating upgrade if Netflix will remain disciplined on its cash content spending to achieve FOCF/debt of 10%. Netflix’s 2020 results had performed much better vs S&P’s forecasts on metrics like paid subscribers (203.7mn vs 195mn) ,adjusted EBITDA margins (21.6% vs 19.2%), cash content spend ($412.5bn vs $16.5bn) and FOCF ($1.9bn vs -$2.4bn). With an acceleration in video streaming and increased subscribers, the rating agency expects Netflix to achieve break-even to positive free cash flow on a sustainable basis in 2021, about two years earlier than previously expected. Netflix has ~$16bn of debt and ~$8bn of cash currently and stated that it will maintain gross debt at $10-15bn. S&P notes that Netflix has historically kept cash equal to two months of revenue but expects it to decline as the need for external financing reduces. Netflix’s 5.875% 2028s were up 1.6 to 125.64, yielding 2.27% and their EUR 3.875% 2029s were up 1.5 to 122.63.

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