Chinese social networking and dating app Momo overcame extreme market volatility to raise $650 million from its first-ever convertible bond sale on Tuesday, underscoring investor confidence in the company’s prospects as it expands outside its core business.
In launching the trade on Tuesday morning, the Nasdaq-listed company appeared unfazed by a massive selloff in the US on Monday, when the Dow Jones Industrial Average plunged 1.3% and fell below its 200-day moving average for the first time in two years on further fears of a trade war. Monday’s drop has extended the index’s 3% loss since mid-June.
However, Momo’s confidence is not without foundation. The stock has been rising steadily since the beginning of the year, fueled by the company’s decision to acquire rival app Tantan in late February.
Momo’s shares have picked up more quickly since mid-May when it successfully closed the $735 million acquisition. Since then, the stock has gained as much as 42% and reached $53.6, the highest level since its initial public offering in December 2014.
And the gamble has paid off. According to a source familiar with the situation, the convertible bond was oversubscribed by multiple times, with investors showing sensitivity to price that allowed the company to eventually settle the bond price in the middle of its initial guidance.
On Tuesday the Reg S/144A trade was launched with a coupon range of 1% to 1.5% and a conversion premium of 40% to 45% over Momo’s $45.34 Monday close. In a structure not commonly seen among Asian issuers, Momo has decided on a seven-year deal with an investor put option at the end of the fifth year.
From an equity standpoint, the price guidance was quite aggressive considering the bond was priced against Momo’s stock at a relatively high level. Even at the cheapest end of the premium range, the bond will bear a strike price at $63.5 – nearly five times its $13.5 IPO price just three and a half years ago.
Still, the company was able to push both the coupon and the conversion premium to the mid-point of the initial guidance at 1.25% and 42.5% respectively. The final strike price of the bond is at $64.61.
Despite Momo being an unrated first-time bond issuer, the joint bookrunners were able to come up with a credit assumption fairly easily by benchmarking it against other US-listed Chinese tech issuers like Ctrip and Weibo.
The market was generally assuming 300 basis point of credit for the debut issuer, which gave the new bond a fair value of about 104%, a bond floor of 80% and an implied volatility of around 34% at the final price.
According to the source, Momo’s strong market liquidity and the abundant stock borrow also helped with the bond sale. As opposed to a lot of highly-leveraged, loss-making Chinese tech companies, Momo was in a net cash position and was profitable, with operating income of $411 million last year.
EXPANSION
Investors are betting on Momo as the location-based social dating app, known as China’s Tinder and widely used as a tool to flirt with nearby strangers, gradually transforms itself into a top live-streaming platform. The firm generated about 30% of its revenue from live-streaming operations in the first quarter this year.
However, Momo appears to be aware of the intense competition in live-streaming and thus continues to strengthen its core social networking business. This is best shown by the acquisition of Tantan, one of the most popular online dating apps in China, which has 20 million monthly active users.
Momo’s latest convertible bond issue, which will be used to finance the $600 million cash portion of the Tantan acquisition, is a good example of taking advantage of strong equity to reduce funding costs.
The company said it was paying off a $300 million loan with a fixed annual interest rate of 4.5% with proceeds from the new bond sale. Since the new bond pays 1.25% interest per year, Momo is effectively saving 325 basis points in interest payment per annum.
It is worth noting that Momo’s latest bond is the biggest by a US-listed Chinese issuer this year, and the fourth-largest equity-linked deal behind Evergrande, Country Garden and China Shipbuilding/PSBC.
The deal also extended the flurry of equity-linked issuance at the beginning of the year despite volatility in the global equity market. Following Momo's deal, total issuance volume in Asia ex-Japan reaches $10.5 billion, 44% higher than last year’s full-year figure of $7.3 billion, according to Dealogic.
JP Morgan, Credit Suisse and Morgan Stanley were joint bookrunners of the convertible bond issue.
