Tencent wires up $2b bond

Chinese internet company raises a dual-tranche debt offering, obtaining a whopping $17 billion order book as sentiment in Asia US dollar credit markets continue to stabilise.

Tencent sold a $2 billion dual-tranche bond on Thursday morning, pricing both issuances at the tighter end of their final price guidance thanks to favourable market conditions.

The Chinese internet company priced the 144A/Reg S offering, which can be broken down into a $1.1 billion five-year and a $900 million 10-year bond at Treasuries plus 162.5bp and 205bp respectively. This is 20bp and 30bp tighter than their initial price guidance of Treasuries plus 185bp and 235bp respectively, according to a term sheet seen by FinanceAsia.

The five- and 10-year bond have a coupon of 2.875% and 3.8% respectively, and a yield of 2.919% and 3.848%. Proceeds of the A3/A- bond will be used for general corporate purposes.

"The proposed notes will further enhance Tencent's already strong liquidity position, enabling the company to sustain a steady growth trajectory in revenue and cash flow," said Lina Choi, a senior analyst at Moody's.

Tencent enjoys material and sustainable revenue contribution from its highly competitive online gaming products, which account for more than 50% of its total revenue.

Over the past two years, revenue from its online games has grown by 35% to 45%, due primarily to its diverse game portfolio with both in-house and licensed titles.

The company operates primarily in mainland China where its social networking service Qzone has 645 million monthly active user accounts and its Weixin and WeChat service had 438 million monthly active user accounts.

The latest issue would follow Tencent’s $2.5 billion bond sale in the US in April last year. Earlier in April, Tencent set up a programme that enabled the company to issue bonds worth up to $5 billion over the following year.

Orders overwhelm

The five-year tranche received a whopping orderbook of $7.5 billion from 420 accounts. US investors purchased nearly half of the notes, followed by Asian investors 37% and Europe 17%.

Fund managers subscribed to 63% of the paper, followed by banks 15%, central banks, insurers and pension funds 15%, and the rest went to private banks.

As for the 10-year offering, it received an orderbook size of $9.5 billion from 480 accounts. Forty-five percent went into US accounts, followed by Asia 33% and Europe 22%.

Fund managers subscribed to 71% of the notes followed by central banks, pension funds and insurers 14%, banks 9% and private banks 6%.

"The bond was proceeded by two days of calls in New York," said a source close to the deal. "[Tencent] received good investor interest and gave us position to go out with the terms."

Comparables

The nearest comparable for Tencent’s five-year bond is its outstanding 3.375% note expiring in May 2019, which was trading at a G-spread of 155bp prior to announcement, according to a source familiar with the matter.

Other comparables include Baidu and Alibaba’s existing 2.75% and 2.5% paper maturing in June 2019 and November 2019 respectively. They were trading at a G-spread of 142bp and 125bp respectively.

As for Tencent’s 10-year offering, the closest comparable is Baidu and Alibaba’s outstanding 3.5% and 3.6% notes maturing in November 2022 and 2024 respectively. They were trading at a G-spread of 160bp and 168bp respectively.

With the eight month curve extension for the five- and 10-year Tencent offerings — based on Baidu and Alibaba’s curve — fair value would come at Treasuries plus 160bp and 210bp respectively, suggesting a new issue concession of roughly 25bp for both tranches, said a Hong Kong-based credit analyst.

“For longer-term buy and hold investors, we expect the deal to ultimately perform if it prices anywhere wide of our fair value based on our view that low US Treasury yields over 2015 will drive persistent inflows into US investment grade credit funds, which will ultimately find the likes of Tencent, Baidu and Alibaba too hard to resist given their 100bp to 150bp pick-up over US tech names,” said the credit analyst.

Come Asia open, the notes have outperformed, with the 5- and 10-year offerings tightening by 2bp and 7bp respectively, according to Bloomberg bond data.

Founded in 1998, Tencent listed on the Hong Kong Stock Exchange in 2004. Its current market capitalisation is HK$1.3 trillion ($163 billion), which is approximately 77% the size of Facebook. The company is also 34% owned by South Africa-based multimedia company, Naspers and 10% owned by Tencent’s founder and Chairman, Ma Huateng.

Barclays, Deutsche Bank and Goldman Sachs were the joint bookrunners of the transaction. Other joint bookrunners include ANZ, Bank of China (Hong Kong), Bank of America Merrill Lynch, China Merchants Securities (HK), Citi, Credit Suisse and JP Morgan.

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