Chinese search engine Baidu raised $1.5 billion in one fell swoop from its first dollar bond, making it one of the biggest debut bonds from a private sector company out of Asia.
Nasdaq-listed Baidu was co-founded by Robin Li, who is one of China’s richest men and the chief executive of Baidu. The company has a dominant presence in the online search industry and is often referred to as the Google of China. However, it has recently faced stiffer competition from upstart Qihoo, which has launched its own search engine.
The company is sitting on plenty of cash — about $3.4 billion in cash or equivalents and has only about $365 million in bank loans taken to finance its acquisition of travel site Qunar in 2011. However, its cash is sitting onshore in renminbi and the company needs to pay 10% withholding tax to transfer it offshore.
“It needs US dollars for capex and proceeds from its latest dollar bond will be kept offshore,” said a source.
The company has said the funds will be used for refinancing and general corporate purposes but it has also hinted at acquisitions in the past. In July, Baidu’s Li told analysts in a conference call after posting its earnings that: “In most cases, I would say I prefer buy to build.” Hence, the bond also helps it build a war chest for potential acquisitions.
Sold to high-grade US investors
The bonds were SEC-registered, which allows the paper to be sold to US retail investors, and it is the second Chinese internet company to issue dollar debt, following Tencent, which has issued two bonds in 2011 and 2012.
Despite the registration, the bonds were mostly allocated to US high-grade institutional investors rather than retail investors. However, the SEC-registration allowed US high-grade investors to get more comfortable with the credit as the disclosure requirements are more stringent.
“The rationale for Baidu to issue an SEC-registered bond was to distance it from Tencent and appeal to US high-grade investors,” said a source. “The Asian premium is narrowing and investors were not just comparing it to Chinese companies and, as a result, it came 90bp inside of Tencent.”
In Asia, comparables for the deal included the CNPC 2017s and 2022s, which were 150bp and 155bp over Treasuries, respectively, and the Tencent 2017s which were at Treasuries plus 255bp.
It was clearly the right decision to market a deal from a Nasdaq-listed company like Baidu to US investors and, unsurprisingly, the two arrangers — Goldman Sachs and J.P. Morgan — were both US banks and had arranged Google’s debut bond in 2011.
“It looks like a good deal,” said one banker who was not involved on the transaction. “Traditionally, there is a large investor pool in the US that understands and likes software companies and internet companies,” he added.
Demand for the bonds proved to be strong, despite weaker markets, and the approaching Thanksgiving holiday. The five-year and 10-year bonds each raised $750 million, and were priced at Treasuries plus 160bp and 185bp, respectively, after chalking up $7 billion of demand for each tranche.
Baidu’s 10-year bond offered a 3.5% coupon, which was less than Google paid for its 10-year bond in 2011, though it paid a bigger spread over Treasuries. The five-year piece offered a 2.25% coupon
Baidu is rated A3/A and J.P. Morgan was the ratings adviser to the company. Both tranches performed in the secondary markets, with the Baidu 2017s traded at Treasuries plus 145bp in secondary, about 15bp tighter, while the Baidu 2022s traded at Treasuries plus 175bp, 10bp tighter.