Chinese search engine giant Baidu returned to the international bonds markets for the first time in a year on Tuesday with a punchy $1.25 billion dual tranche deal.
The A3/A rated issuer is likely to be extremely happy with the pricing it secured for its 5- and 10-year offering, which bankers argued came flat to its own curve and through rival Tencent's secondary market trading levels.
China's biggest tech groups have proved time and again to be very good at pulling investors into their bond deals due to the combination of a compelling growth story and starry brand name. However, secondary market trading does not always live up to investor expectations and accounts that participated in Baidu's deal will be hoping for continuing positive momentum from Greek debt talks to feed through into a positive market tone on Wednesday.
Volatile market conditions mean Baidu was not able to generate the $17 billion order book that greeted Tencent's similar two-tranche bond deal in February. However, it did garner $7.9 billion in demand, which is a remarkable achievement considering the secondary market backdrop.
This demand was fairly evenly split between the 5- and 10-year tranches, with the former generating $4 billion in orders from 250 accounts and the latter $3.9 billion in orders from 260 accounts.
Goldman Sachs and JP Morgan were joint bookrunners.
Pricing of a $750 million five-year issue was fixed at 99.866% on a coupon of 3% to yield 3.029% or 135bp over Treasuries. Initial price guidance had been set at 160bp over.
The 10-year came in at $500 million on an issue price of 99.830% and coupon of 4.125% to yield 4.146% or 175bp over Treasuries. This was initially marketed at 200bp over.
By geography, 51% of the five-year went to the US, followed by 34% to Asia and 15% to Europe. Where the 10-year was concerned, 45% went to Asia, 37% to the US and 18% to Europe.
By investor type, funds took 64% of the five-year, followed by insurance funds and agencies on 16%, banks with 15%, private banking 3% and others 2%. For the 10-year, funds took 61%, insurers and agencies 21%, banks 12%, private banking 3% and others 3%.
"Baidu priced flat to the secondary market trading level of its 2019 bond and theoretically through it since there is a one-year maturity extension," one source close to the deal said.
"Both tranches are also tighter than where Tencent priced its deal earlier this year and where it is now trading despite the rating difference," the source added. "Investors like Baidu's business model."
Baidu's outstanding bond comprises a 2.7% June 2019 issue. However, one leading Chinese bank was quoting the existing deal at a tighter price than the new deal on Tuesday.
Its bid price was 99.58% on a yield of 2.544% and spread of 117.64bp over Treasuries.
The other key comparable is Tencent, which has an A2/A rating, one notch higher than Baidu from Moody's.
Its two recent deals comprise a 2.875% February 2020 bond and a 3.8% February 2025 bond.
The same Chinese bank was quoting the 2020 bond just above its February issue price of 99.797% on Tuesday. It had a bid price of 99.92%, equating to a yield of 2.781% or 119.95bp over Treasuries.
But its 2025 bond was quoted the same day below its 99.605% issue price at 97.01% to yield 4.009% or 164.97bp over Treasuries.
Credit profile
In its ratings release, Moody's said that Baidu's new deal should help push its debt to Ebitda ratio up to just under two times by the end of 2015, although it added this remained well within the A3 rating spectrum. At the end of 2014, it stood at 1.5 times, according to Baidu's marketing presentation to investors.
The US rating agency also commended Baidu for its, "steady cash flow generation, conservative financial management and disciplined appetite for acquisitions." It said this has helped the group to maintain low debt leverage and a strong net cash position.
Baidu's presentation said net cash stood at $5.2 billion at the end of March, with free cash flow of $1.993 billion backed by revenues of $8.4 billion and Ebitda of $2.7 billion. It added that free cash flow to total debt came in at 0.5 times, while adjusted Ebitda to interest expense was 23.8 times.
The group's search engine had 600 million active users at the end of the first quarter, while 270 million were using its maps (62% market share) and its Apps had a 42% market share.
The company is now focusing its attention on healthcare, education and financial services applications and business partnerships, which is putting some pressure on margins. However, its two-year transition from PCs to mobile has been very successful, with the latter growing from 10% of revenues in the second quarter of 2013 to 50% by the first quarter of 2015.
Baidu has also been investing in voice and visual search technology. It believes these will progressively play a more important role and could account for up to 50% of all searches within the next five years.
Greek logic
In Europe, governments are still searching for a successful algorithm to keep Greece within the Eurozone while forcing it to embark on a new round of restructuring.
In a research note published on Tuesday, Chris Platt from Global Prime Services wondered whether a bad deal would be better than no deal at all but concluded he is beyond caring.
"I have had to learn the hard way that the 'political will' does not do cost/benefit analysis the way most of the rest of us do," he said. "As long as the politicians can reap the benefits while the tax payers bear the cost, all is well in the garden."
He said markets would continue to rally on the grounds that the problem will get kicked further down the road.
