China's second-largest e-commerce platform JD.com made its international bond market debut on Friday, raising $1 billion from a dual tranche offering.
The SEC registered deal follows a flurry of activity by Chinese issuers over the past week as borrowers position themselves ahead of monetary policy meetings in the US and Japan this week.
The Baa3/BBB- rated transaction managed to achieve a reasonable though fairly unspectacular order book, which stood at $1 billion shortly after launch and built up to $3.5 billion by the time final guidance was released.
Syndicate bankers said demand was pretty evenly split between the five- and 10-year tranche with Asia taking roughly 60% of the overall deal and fund managers 50%.
The related subdued demand for one of China’s foremost brands is possible the result of radically different views over where fair value should lie.
On the one side, the syndicate positioned JD.com as the archrival to Alibaba, which raised a record-breaking $8 billion from its own debut six-tranche bond in November 2014. It achieved an even more spectacular order book of $55 billion.
The rating agencies more or less backed this argument up, assigning the lowest rung investment grade ratings to a loss-making company, although five notches below Alibaba, which is rated A1/A+.
On the other side, a number of other brokers argued that the agencies got it wrong. They believe JD.com should be considered a high yield credit because of its unprofitable status and the fact that it is more of a capital-intensive and hence inherently more volatile tech company than a consumer cash cow.
One wrote, “The agencies arrived at BBB- or equivalent assuming the captive finance business is carved out, arguing it will be self-funded. However, we are sceptical of this methodology.”
The broker added that JD.com’s debt servicing ability should “take into account all its operations holistically given the entire entity is the guarantor of the bond. This will render the consolidated financials severely cash flow negative.”
A second commented, “We think the company’s low profitability, huge capex and ambitious growth appetite are elements for which creditors need to be sufficiently compensated. We, therefore, think JD.com bonds need to provide a 100bp pick-up over Alibaba.”
In the end, investors had to be satisfied with half that level.
The company initially marketed its five-year tranche at 215bp over Treasuries, before tightening pricing by 20bp to 5bp either side of 195bp over Treasuries.
Final pricing of the April 2021 $500 million transaction was priced at 99.418% on a coupon of 3.125% to yield 3.252% or 190bp over Treasuries, according to a term sheet seen by FinanceAsia.
For the 10-year tranche, the notes were initially marketed at 245bp over Treasuries, before guidance was tightened by 20bp to 5bp either side of 225bp over Treasuries.
Final pricing of the April 2026 $500 million deal was priced at 98.298% on a coupon of 3.875% to yield 4.084% or 220bp over Treasuries.
Slim differential to Alibaba
During Asian hours on Friday, Alibaba’s existing 3.125% November 2021 bonds were trading around the 101.556% level to yield 140bp over on a G-spread basis.
Its 3.6% November 2024 bonds were trading around the 101.366% level to yield 164bp over on a G-spread basis.
Given there is 24bp between two bonds, which are three years apart, this suggests a curve that is worth about 8bp per annum. On this basis, a new Alibaba 2026 bond would trade around the 180bp level.
This means JD.com’s five-year bond has offered a 50bp pick-up to Alibaba, or 54bp on a curve-adjusted basis. The 10-year was even more aggressive, offering a 40bp pick-up on a curve-adjusted basis.
Other comparables include Baa1/BBB+ rated eBay, which has a 2.875% August 2021 bond trading on a G-spread of 120bp.
Then there is Baa1/AA- rated Amazon, which has a 3.3% December 2021 bond around 57bp.
The final comp is JD.com shareholder Tencent, which has an A2/A rating and a 3.8% November 2025 bond around the 155bp level on a G-spread basis.
Syndicate bankers argued that a 40bp to 50bp over Alibaba represented a fair premium. At the heart of the disagreement are the very different business models deployed by Alibaba and JD.com.
Turning profitable?
The former runs retail sites Taobao and Tmall and adopts a marketplace model, which connects between buyers and sellers online.
The latter is more like Amazon, providing inventory and delivery services – a high cost model that makes the company unprofitable, just like Amazon has been for much of its operating life. As a result, JD.com has consistently reported losses despite generating revenues of Rmb181 billion in 2015 and a forecast Rmb260 billion in 2016.
One Hong Kong-based credit manager told FinanceAsia that Chinese Internet companies are burning cash at a “staggering pace” and need to frequently refill their war chest for acquisitions.”
A $9 billion spate of M&A transactions since its IPO includes the sale of a 15% stake in its fintech arm to a group of investors led by US venture capitalist Sequoia Capital in January. JD Finance raised $1 billion from the Series A round, valuing the company at $7 billion.
The fund manager told FinanceAsia, "investors want a clear path to profitability to underpin the rating.”
Consensus expectations are still forecasting a loss in 2016, although many analysts believe JD.com will turn a profit in 2017.
On the plus, side they also point out that the group will remain in a net cash position throughout 2016 and 2017.
In a recent research report, Haitong said the company is poised for a period of strong revenue growth and profitability thanks to its focus on authentic goods and investment in logistics, which should strengthen its pricing power.
“We expect JD to continue to gain market share and its revenue to maintain high growth of 47% for FY 16, 37% for FY 17 and 34% for FY 18,” it wrote. “Chinese consumers are becoming increasingly savvy and JD’s efforts to offer ‘real’ (not counterfeit) products and logistics should lead to higher quality purchases and a stickier customer base.”
JD.com also has a habit of confounding expectations. Its Nasdaq listing in 2014 was not heavily subscribed. But investors who participated made a return of 50% within the first three months.
Joint bookrunners of the transaction were: Bank of America Merrill Lynch and UBS, while Barclays joined the duo as a co-manager. The two lead managers were also JD.com's bookrunners for its $1.8 billion initial public offering on the Nasdaq in 2014.
