Chinese technology giant Tencent shrugged off a flare-up in Sino-US relations last week to print the largest bond from a Chinese corporate so far this year.
The $6 billion it raised equalled the amount printed by Malaysian oil and gas company Petronas in April and the amount that Tencent itself raised in April last year.
In what was a busy day in region’s G3 capital markets, it was also when US secretary of state Mike Pompeo threw petrol on the sparks caused by the decision of Beijing to impose an anti-sedition law on Hong Kong saying that he would no longer treat Hong Kong as autonomous for trade and economic purposes.
Investor demand was not to be distracted and books for the four-tranche deal, which was priced off the company’s $20 billion global medium-term note programme, swelled to $36 billion. This allowed pricing to come in as much as 55 basis points at the long end of the curve for the Reg S/144a deal.
As is very much the trend of the second quarter, especially for investment-grade names, Tencent decided to push out its curve to lock in funding at historic low levels. To accompany five-year and 10-year tranches, it brought a 30-year and 40-year piece.
Initial price guidance for the four tranches was US Treasuries plus 175bp area; T+200bp area; old long bond (OLB) +220bp area, and; OLB+240bp.
Although 30-year and 40-year bonds are typically marketed over yield rather than spread, bonds with longer tenors are conventionally priced over the old 30-year long treasury bond, explained a banker with knowledge of the matter.
Final price guidance tightened across the board, before the $1 billion 2026s priced at T+145bp; the $2.25 billion 2030s went at T+170bp; the $2 billion 2050s printed at OLB+180bp; and the $750 million 2060s priced at OLB+185bp.
“We have a strong balance sheet with ample and highly liquid assets, and the first issuance of 40-year tenor notes extended our credit curve further and balanced our debt maturity profile,” said chief financial officer John Lo.
“Going forward, we will continue to stay prudent in our financial management and focus on maintaining the right balance between capital expenditure, investments and returns,” he added.
Tencent said that it was the lowest coupon ever achieved by the company in the tranches out from 30-years and the lowest coupon ever seen on 30-year and 40-year tranches in the China tech space.
What is also worthy of note is the lack of new issue premium that Tencent had to pay. Bankers close to the deal say that the bonds priced flat to the curve across all tranches.
The 10-year tranche for Tencent’s bond sale last year went at T+145bp. Spreads have widened since then, however, and as the new deal priced it was trading at T+171bp. This suggests that the new 10-year priced inside Tencent’s own curve, especially given the additional one-year on the bond.
And compared with the Petronas deal in April, Tencent paid significantly inside that on the longer tranches – 134bp and 154bp respectively. Even though Tencent does have a higher rating than Petronas, that contraction speaks to how much markets have changed over the past six weeks.
The bonds have an expected rating of A1/A+/A+ with ratings agencies nodding their approval.
“The proposed notes will further enhance Tencent's already strong liquidity position and enable it to sustain steady growth in revenue and cash flow," said Moody's senior vice president Lina Choi, before the bond priced.
Bank of America, HSBC, Morgan Stanley and Goldman Sachs were joint global coordinators with Bank of China (Hong Kong), Mizuho Securities, Barclays Bank, Credit Suisse, Deutsche Bank, ICBC, JP Morgan and SPDB International Capital Limited as lead managers and joint bookrunners.
GAMING FOR FUN AND PROFIT
The bond comes as Tencent rides high in the markets. It is one of the few companies to have benefitted from the global Covid-19 lockdown as people turned to smartphone games like Honor of Kings, PUBG Mobile and Clash of Clans to keep themselves occupied.
Reporting first-quarter results in mid-May, Tencent’s revenues for the first quarter of the year jumped 26% to Rmb108.1 billion ($15.3 billion) thanks, partly to online games revenues that rose 31% to Rmb37.3 billion.
“Our businesses have proved resilient and cashflow-generative,” said chairman and chief executive Ma Huateng.
Analysts broadly agree. Although some question whether the strong growth in gaming will continue now that quarantine restrictions are being eased, many believe that it will continue. “Tencent will also benefit from the weak job market. As small businesses are in trouble, many employees will not work overtime,” noted Ming Lu, analyst at Aequitas Research who publishes on Smartkarma.
The tech giant is continuing its widespread acquisition policy. In late May it took a $65 million 20% stake in Japanese game developer Marvelous and is reportedly in talks to take a 20% stake in Warner Music Group, one of the big three recording companies.
But the company’s most significant recent move came at the end of the May when it said that it intended to invest Rmb500 billion over the next five years in technology infrastructure including cloud computing, artificial intelligence, blockchain, 5G networks and cybersecurity among others.
“We believe that accelerating the new infrastructure will help to achieve a closer connection between the supply side and the demand side of the digital economy, provide a strong guarantee for the development of the industrial internet, and achieve high-quality economic development,” said Tang Daosheng, president of Tencent's cloud and smart industry business group.
Coming on the back of recent calls from Beijing to upgrade the new infrastructure, Tencent’s commitment puts it in pole position to reap the rewards when they come through and allow it possibly close the gap with market leader and arch-rival Alibaba.
