OP 2019: Corporate credit crunch pushes Netflix into GE’s vortex

Peter Garnry

Head of Equity Strategy

Summary:  The once all-powerful General Electric is foiled by the magnitude of its liabilities and the contagion ripples through the markets, bringing content king Netflix to its knees.

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2019 proves the year of credit dominos toppling in the US corporate bond market.
It starts with General Electric losing further credibility in credit markets, pushing
the credit default price above 600 basis points as investors panic over GE’s $100
billion in liabilities rolling over in the coming years at the same time as the firm sees
deteriorating cash flow generation.

GE loses its ability to contain the damage and files for Chapter 11 and restructuring,
selling off assets and consigning the once-glorious industrial giant to the dustbin of
history.

The event sends shockwaves through global credit markets as investors realise that
the Powell Fed has already tightened financial conditions beyond the market’s ability
to bear. Credit spreads over the Treasury curve widen rapidly, painfully lifting funding
costs for US companies. The carnage even spreads as far as Netflix where investors
suddenly fret about the firm’s fearsome leverage, with a net deb t to EBIDTA after
CAPEX ratio of 3.4 and over $10bn in debt on the balance sheet.

Netflix’s funding costs double, slamming the brakes on content growth and gutting the
share price. To make things worse, Disney’s 2019 entrance into the video streaming
industry trims Netflix growth further still.

The negative chain reaction in corporate bonds sets off massive uncertainty in high-yield bonds leading t o a Black Tuesday for
exchange-traded funds tracking the US high-yield bond market where ETF market
makers are unable to set meaningful spreads, forcing a complete withdrawal from the
market during a tumultuous trading session.

The fallout in the ETF market becomes the first warning shot of passive investment
vehicles and their negative impact on markets during turmoil.

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