Chinese video streaming service iQiyi priced the largest convertible note offering in Asia ex-Japan so far this year on Tuesday, making a swift return to international capital markets despite concerns over tighter censorship of online content.
The unrated issuer took advantage of a decent rally in its stock price to raise $1.05 billion from its six-year convertible bond sale, giving it some much-needed cash for marketing and promotion in order to fight for eyeballs in China’s highly-competitive video streaming market. By the close of business on Monday, its share price had risen more than 60% year-to-date.
iQiyi has burned through more than half of the $2.3 billion it raised through its US initial public offering in less than a year by investing heavily in proprietary content, aiming to differentiate itself from video sites that focus squarely on third-party content.
Last year, the Netflix-like video streaming service spent $923 million on operating expenses, which includes the production of the competition show The Rap of China and street dance variety show Hot Blood Dance Crew. Baidu, iQiyi’s parent company, has said it expects the expenditure this year to increase further.
The Nasdaq-listed company had $663 million in cash holdings as of the end of last year, according to its financial statement.
Tuesday’s convertible bond sale – described by some traders as an opportunistic trade – saw iQiyi raise more than a third of the $750 million in proceeds it raised from a similar convertible bond deal four months ago.
LONGER, CHEAPER
To be sure, demand for the new Reg S/144A deal was supported by iQiyi’s stronger share price compared with when the last deal was launched in November. iQiyi’s $24.02 Monday close was 20.5% higher than this November level, before the market tanked towards the end of 2018. Its outstanding convertible note was also trading about 16 points higher before the new deal was launched late Monday.
But perhaps the most pleasing aspect for the company was that it was able to extend its maturity by a year, successfully selling a six-year, four-year put deal compared with November’s five-year, three-year put deal.
At the same time, the new 2025s were priced at the tightest end of the 2% to 2.5% coupon range, implying iQiyi was able to reduce its interest cost by a massive 175 basis points compared with the 3.75% 2024s.
The new bond was priced at the highest-end of the 27.5% to 32.5% premium range, translating into a $30.3 conversion price. However, the final premium was more moderate at 26.1% as the deal was eventually priced off its $22.87 Tuesday close. The stock ended 4.8% lower on Tuesday.
Assuming a 450bp credit spread, the new bond has an implied volatility of around 29% and a 83.3 bond floor at the final price.
It is worth noting that investors in iQiyi appeared unfazed by expectations Beijing could be about to impose stricter censorship on video content.
Global Times, a state-run publication, said on Sunday that the media regulator is ready to ban all historical dramas until June, claiming they promote luxurious lifestyles that conflict with the core Chinese values of hard work and virtue.
Many historical dramas have already been pulled from online sites in response.
iQiyi’s new convertible bond deal is the largest of its kind in Asia ex-Japan this year, surpassing Nio’s $650 million offering in January.
Goldman Sachs, Bank of America Merrill Lynch and JP Morgan were joint bookrunners of iQiyi’s bond sale.
