Tencent attracts huge demand for $600 million bond

An order book of close to $6.3 billion allows the Chinese internet giant to price at a negative new issue premium.
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Photo: Imaginechina</div>
<div style="text-align: left;"> Photo: Imaginechina</div>

Less than nine months after it issued its maiden dollar bond, Chinese internet portal operator and mobile value-added services provider Tencent Holdings was back in the market on Tuesday, taking advantage of the sharp narrowing of bond spreads since its previous deal. This allowed the company to raise funding at very attractive levels, observers said.

And investors clearly liked the initiative. Although the $600 million deal priced well within 24 hours of launch, it attracted just over 300 accounts and a massive order book of close to $6.3 billion, which translated into a coverage ratio of 10.5 times and allowed the company to price at a negative new issue premium.

The fact that Tencent is still the only internet company and one of very few technology companies in Asia to have issued a dollar bond was likely part of the attraction, but the demand also shows exactly how much cash is sitting on the sidelines. And, according to a source, it is testament to the job that Tencent has done in terms of broadening its shareholder base since it December issue. That deal, which was also $600 million, gathered an order book of $1.3 billion from 128 accounts.

However, the company has had a massive boost since then, partly because Facebook’s IPO has put Internet and social media companies in general in the spotlight. Tencent was already China’s largest and most used Internet portal with the second largest subscriber base in the world after Facebook. However, since the December issue its market cap has swelled from $36 billion to more than $57 billion, which means it now larger than Facebook in that respect.

The number of credit analysts who cover the company has also increased since it was first in the market.

Tencent is the largest Chinese online games company by revenue and it holds a dominant position in the instant messaging and social networking space through its QQ and Qzone offerings. South African media group Naspers owns close to 35% stake in the company and Tencent also counts a few ex-Goldman Sachs employees among its management, including its president, Martin Lau, who joined the Chinese company in 2005.

It is rated Baa1 by Moody’s and BBB+ by Standard & Poor’s.

The new bonds have a 5.5-year maturity and were launched on Tuesday morning with an initial guidance of 300bp over the five-year US Treasury. This was firmed up in the late Asian afternoon to 275bp to 285bp and the price was eventually fixed at a spread of 275bp.

The coupon was fixed at 3.375%, which, according to banks involved in the deal, is the lowest coupon ever from a private Chinese corporate issuer. The bonds were reoffered at 99.771 for a yield of 3.421%.

The key comparison was Tencent’s own outstanding bond, which matures in December 2016 and which was trading at a spread over Treasuries of 260bp at the time of pricing. Using the interpolated spread, one source said a new implied five year should trade at about 270bp over Treasuries. And after accounting for the swap curve and credit extension (the new bonds mature on March 5, 2018) you get a fair value of about 280bp to 283bp, he said.

This means that Tencent’s new bonds priced some five to eight basis points inside the perceived fair value. However, the market seemed to agree with the price as late in the Asian trading day the bonds were quoted at 273bp/271bp. Earlier in the session, they had widened slightly and at one point were offered at 277bp.

About 40% of the deal was allocated to US investors, who are perhaps the most familiar with internet companies. Some 37% went the Asian accounts and the remaining 23% ended up in Europe.

In terms of types of investors, the bulk of the deal, or 67%, was bought by funds, followed by retail investors, who took 12%. Banks and insurance/pension funds each got 6%, official institutions were allocated 4% and 5% went to others.

The Tencent offering sparked some life into a week that, according to one observer, has so far been the second quietest week since Christmas. However, a lot of deals are in the works and from September onwards the market is expected to be extremely busy. Hence the reason why Tencent chose to go now.

The company didn’t specify what it will use the money for, saying only that it will go towards general corporate purposes.

Barclays, Deutsche Bank and Goldman Sachs were joint global coordinators for the offering, while ANZ, Citi, Credit Suisse and J.P. Morgan joined them as bookrunners.

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