Asia’s G3 primary bond markets could hardly have got off to a better start this January after JD.com brought China’s first jumbo bond offering of 2020.
Sizeable, sexy and with spread performance to boot: such were the hallmarks of a $1 billion 10- and 30-year deal, with a $5.3 billion order book at the re-offer and 2bp and 8bp respective first day tightening despite a risk-off market backdrop.
The SEC-registered transaction ticked many of investors’ boxes, notwithstanding concerns about historically tight spreads and geopolitical tensions following an Iranian rocket attack on US bases in Iraq. Chinese tech deals also rank as dream dates for investment bankers, although the latter would undoubtedly be happier returning home with a fatter wallet.
They also wish there were more of them. When FinanceAsia canvassed the sell-side for their 2020 predictions during December, it was tech bonds, which topped most wish lists. As one banker put it, “It’s Asia’s sexiest sector and frankly, I wish there were more issuers, more often.”
Indeed, Dealogic figures show that over the past six years issuance volumes have struggled to break out of the low-teens billion dollar range (see table 1). Issuance has also been very concentrated.
There has generally been one mega deal per year (Alibaba in 2014 and 2017: Tencent in 2015, 2018 and 2019). In most instances, the investor response has been overwhelming, topped by the $55 billion order book for Alibaba’s debut $8 billion deal in 2014.
Asia has come a long way since low-margin capital-intensive hardware companies from Taiwan and South Korea dominated the tech landscape at the turn of the century. Today, it is high-growth, cash-rich e-commerce giants from right across the region.
Their credit appeals to bond investors on two levels. Strong balance sheets mean they are unlikely to go bust and they offer much-needed diversification from the real estate and the traditional manufacturing credits that account much of the region’s corporate bond issuance.
Table 1 - Asian tech bond issuance
| Priced Year | Deal Value USD (m) (Proceeds) | No. |
|---|---|---|
| 2014 | 14,362 | 9 |
| 2015 | 6,828 | 9 |
| 2016 | 3,479 | 4 |
| 2017 | 13,000 | 13 |
| 2018 | 12,356 | 13 |
They do not even have to be profitable, as JD.com itself demonstrated when it executed its debut dollar bond in April 2016. The then Baa3/BBB- rated group raised $1 billion from a 3.875% 2026 transaction.
Since then, Moody’s and Standard & Poor’s have respectively upgraded the company to Baa2/BBB. Its bonds have also turned in a very strong performance over the past year, tightening from a 5.56% yield at the beginning of 2019 to 3.096% on the day the company launched its new deal in 2020.
This 245bp-odd contraction was in large measure a function of the wider market’s momentum. But it also reflected a sector-specific reversal. For sentiment towards the tech sector had previously turned negative in the middle of 2018 when equity investors, in particular, became worried about high valuations and then Sino-US trade tensions.
This turnaround and wider market bull run meant that tech ended 2019 as one of the region’s star performers. Some credit analysts are consequently muted about upside potential this year.
In its 2020 outlook, JP Morgan concluded that it did “not see value in the broader China TMT space, with Tencent fully valued.” The two credits it did state a liking for were Sunny Optical (2023 bonds) and Baidu (2027 bonds).
Over the past year, the premium that Asian tech credits trade over their US peers has also narrowed by about 70bp at the short-end of the curve and 30bp at the long-end.
Yet investors’ reaction to JD.com suggests that they are still keen to diversify into the sector even if pricing is aggressive and yields are at historical tights. In this instance, the bond’s lead manager were able to narrow indicative pricing on the 10-year tranche by 35bp and introduce a 30-year late in Asia's afternoon on the back of reverse enquiry demand from one account.
Follow-on buying from Asia also meant that the bonds still held up in the after-market even though US Treasuries had sold off 10bp in response to events in the Middle East.
AN ISSUER'S MARKET
This all suggests that the current market climate firmly favours issuers over investors. Last year, US tech companies took full advantage of the latter’s desire to put their cash inflows to work (see table 2).
Notably, triple-C rated Uber Technologies raised $1.2 billion from a 10 non-call five deal last September that has since traded up two-and-a-half points.
Table 2: US tech bond issuance
| Priced Year | Deal Value USD (m) (Proceeds) | No. |
|---|---|---|
| 2014 | 78,269 | 61 |
| 2015 | 136,457 | 68 |
| 2016 | 148,038 | 62 |
| 2017 | 155,704 | 81 |
| 2018 | 35,118 | 42 |
Asian tech issuers have a long way to go before they hit US financing levels and are also swimming in cash, which limits their funding appetite. One good example is on-demand services provider, Meituan Dianping. At the end of the third quarter, the Hong Kong listed company had a $3.4 billion net cash position according to S&P Global Market Intelligence data.
Historically, Asian tech companies have also turned to the public equity markets and private equity markets ahead of debt for their financing needs. So too, unprofitable companies like Singapore’s Sea Ltd often favour convertibles, which appeal to investors as enhanced volatility plays.
The New York Stock exchange-listed e-commerce and digital entertainment company used the structure to raise $500 million in June 2018 and then $1 billion in November 2019, both via Goldman Sachs. Nasdaq-listed Pinduoduo also executed its first convertible last September, raising $1 billion.
On the whole, investment bankers believe that Asian tech companies could do a lot more to optimise their capital structures.
“They tend to rely on syndicated loans or shareholder financing,” said one banker. “It’s clearly cheaper to access the loan market at the shorter-end of the curve, but the bond market wins out at the long-tend.”
And that is one of the greatest incentives for Asian tech bond issuance this year, as JD.com demonstrated with its last minute inclusion of a 30-year tranche. Current market conditions are enabling tech companies to lock in very long-term funding at very low absolute and relative rates.
It re-affirms investors belief that they are here to stay: that they will not be usurped by newer rivals, nor forced to continually ploughing revenues into the next technological iteration.
A number of new economy companies may also feel that the timing is right to make their first statement in the bond markets now, because a string of them have floated their shares over the past few years.
For a company like Xiaomi, a successful bond deal might help to restore its battered reputation in the international financial markets. Since it listed in the summer of 2018, the Smartphone and Internet-of-Things company has taken investors on a fairly torrid ride.
Investment bankers also believe that bond investors will be receptive to unprofitable credits, although they say the club is a highly select one.
“Generally speaking, investors don’t like unlisted or unprofitable companies for the obvious reasons that they’re less transparent and might not pay them back,” one banker commented. “But that doesn’t apply to regional and national e-commerce champions like Grab in Singapore, or Indonesia’s Gojek, Traveloka and Tokopedia.”
There seems little doubt that all four would be lapped up. Whether they will want to access the public bond market at a time when they are actively preparing for IPOs is another matter.
In the meantime, obvious issuance candidates include Baidu and possibly Tencent since their debut international bond deals, executed during the middle of the past decade, are coming up for redemption. The former has a $750 million deal maturing in June, while the latter has a $1.1 billion deal maturing in February.
Global co-ordinators for JD.com’s deal were BofA Securities and UBS, the two banks that led its last bond deal and its IPO. HSBC was joint lead manager.
Final deal terms comprised a $1 billion 10-year tranche with an issue price of 99.68% and coupon of 3.375% to yield 3.413%. A $300 million 30-year tranche was priced at 98.98% on a coupon of 4.125% to yield 4.185%.
The order book had a $4 billion skew to the 10-year. That tranche numbered 201 accounts.
By geography, 52% was placed in Asia, 20% in EMEA and 28% in the US. Asset managers were allocated 70%, insurance companies 15%, private banks/banks 10% and public institutions 5%.
The 30-year tranche had 90 accounts, with the US taking 47%, Asia 33% and EMEA 20%. By investor type, asset managers were allocated 60%, insurance companies 37% and private banks/banks 3%.
