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Why is Netflix Listing its European Bonds on the Isle of Guernsey?

posted by Mitu Gulati

Netflix has long interested me as a company, not only because of shows like "Master of None" (Aziz Ansari and Alan Yang have delivered brilliantly), its darwinian management philosophy (very cool podcast on Planet Money), but because of its uncertain future. It is competing against rich giants like Amazon and Apple to deliver original content in a field that is getting increasingly crowded.  My guess is that it is having to spend more and more on content, but is unable to increase its prices very much. One solution for Netflix: borrow at a high interest rate from investors who are willing to bet on your future.  And that it has done, in spades. Most recently -- a few days ago -- it borrowed $1.6 billion (yes, billion). I was intrigued and trying to avoid doing my real work, so I went looking for its offering documents and while I didn't immediately find the current docs, I found the offering circular for the bond issue Netflix did a few months prior in Europe (Euro 1.3 billion) in an offering listed on the International Stock Exchange, which is an exchange licensed by the Bailiwick of Guernsey.  Yes, really. So, surely, at least some of you are asking the same questions I am. What? Where? Who?

Guernsey, for those of you who are clueless like I am, is a British Crown "dependency" (not sovereign, but not independent, and not quite like a former colony like the British Virgin Islands or Bermuda (they are "British Overseas Territories")). Basically, a cynic might say: Perfect for a tax haven. But it is the stock exchange that interested me, especially since it seems to have been quickly rising in popularity for US and EU companies over the last couple of years.

If I remember my basic corporate finance class (I don't), we were told that exchanges performed a monitoring and disciplinary role; they were "gatekeepers", as the fancy corporate types liked to say. So, is Netflix going all the way to the Isle of Guernsey to get extra special monitoring from the Channel Islanders? Curious, I went to the website for the Guernsey exchange, to see what it said. And it does say that it has wonderfully rigorous regulatory standards ("some of the highest regulatory standards globally"). But does it really?

The paragraph that follows the "highest regulatory standards globally" stuff on their website caught my eye. I've underlined my favorite bits.  From the website:

The exchange is present in the three British Crown Dependencies, which are leading international finance centres at the forefront of cooperation on international tax initiatives and have some of the highest regulatory standards globally. In addition, they are English speaking, use the British pound sterling and in the same time zone as and with close links to the UK but outside of the European Union.

Being outside of the EU means that its regulations and directives do not apply unless voluntarily accepted. For example, from July 3 last year, the EU introduced the Market Abuse Regulation (MAR) aimed at improving transparency of trading in the equity markets where there are retail investors. However, the blanket approach has also brought into scope debt listings, and is disproportionately onerous on high yield bonds which are less frequently traded and held by sophisticated investors.

TISE has not changed its rules and the fact that it has the ability to regulate according to the type of product means it can offer a more proportionate regime. As a result, we have seen some migrations from Ireland and Luxembourg but predominantly, we are seeing new issuances coming to us. Since July last year, TISE has been chosen by more than 30 issuers – comprising a mix of private and public, and EU and US companies – including a €1.3 billion ($1.45 billion) high yield bond from Netflix.

It strikes me that it is possible, just maybe, that the foregoing is saying that their main selling point on the Guernsey exchange is not the "highest standards globally" bit, but that they aren't anywhere near as rigorous as the EU with its evil new MAR regs. The fact that these are considered particularly onerous for "high yield" bonds struck me as especially hilarious, given that "high yield' (like Netflix) is high risk and, at least to me, seemingly especially in need of rigorous monitoring. But maybe there is a deeper story along the lines of the EU regs just being inefficient and asking for the wrong types of information blah blah.

In more academic terms then: Is this a race to the top (highest regulatory standards in the world?) or to the bottom (we won't ask you for all of that regular reporting about your lack of profits that the meanies in Brussels demand)?

On the Netflix side, I was intrigued by the contract clause governing Netflix's promise to list that is reported in summary form in the offering memo. It seems to say that Netflix, can at any time, if the folks in Guernsey ask for too much stuff (that is, they start taking that "highest regulatory standards" stuff seriously) promptly de-list. If I were an investor counting on the folks in Guernsey to be my gatekeepers or police or whatever the right metaphor is, I'm not sure I'd want de-listing to be this easy. And that in turn suggests--if we assume smart investors . . .

In a different world, Elisabeth de Fontenay, Josefin Meyer and I have a paper on listings where we suggest that, at least in the area we examine, modern listings are something of a sham  (I am a tag-along third author on that paper; Elisabeth and Josefin did 99% of all the real work). Elisabeth and Josefin find from empirical tests over thousands of bond issuances in the sovereign area that there is no indication that the market sees listing in the dominant jurisdiction (Luxembourg, in that study, although Dublin is a rising star) as providing a credibility premium. What I find hilarious here is that the interviews that E&J did to try and understand this puzzle suggest that the people doing these deals (at least the senior lawyers) are themselves puzzled by why anyone (at least in the sovereign area) lists anywhere. Rigorous oversight does not seem to be the answer. Although maybe it is on the Isle of Guernsey? (yes, I like saying "Guernsey").


As a former corporate debt structurer, I suspect the reason for a listing has to do with taxes or regulation. Most corporate bonds are sold to institutions and trade over the counter, and in the U.S., corporate bonds are almost never listed at all. In many foreign jurisdictions, a listing on a "qualified exchange" is a way to avoid withholding tax on coupon payments. If I remember correctly, a listing also helps issuers comply with EU Prospectus Directive rules. So Netflix was shopping for the easiest and cheapest listing that qualifies for those purposes.

In my experience, bond investors would place no value on the bond's exchange's monitoring functions. If investors value a listing at all, it would be Netflix's primary equity listing that imposes all the relevant monitoring, governance standards, etc.

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