Chinese social media giant Tencent announced Thursday that it had raised $6 billion in a bond market issue. The issue is the biggest this year in Asia.
Tencent’s move came only hours after Chinese streaming film Bilibili raised $824 million from a convertible bond and share sale in New York. And it followed just days after the larger and more generalist streaming firm iQIYI raised $1.05 billion from a convertible bond sale, also in New York.
The moves reflect the confluence of several favorable factors in the finance markets and the return to investor favor of Chinese tech firms. The most significant reason appears to be that the U.S. Federal Reserve has indicated that it is not planning further interest rate increases in 2019. That makes corporate debt more attractive in comparison. Tencent’s $2 billion of bonds with 5-year maturity will pay a coupon of 3.28%, while its $500 million of 30-year bonds will pay out at 4.525%.
Several Chinese tech and media companies have listed their shares in the past two years. In addition to Bilibili and iQIYI , which both conducted IPOs in March 2018, the list includes phone maker Xiaomi, video group Pinduoduo, Tencent Literature, Tencent Music, and ticketing firm Maoyan. Last year’s weak equity markets meant that some companies were not able to raise as much fresh capital from their IPOs as they hoped. The convertible bond issues can make up for those shortfalls.
Bonds which are convertible into equity at pre-determined prices are the equivalent of issuing shares at a premium. In the short term they are cheaper for issuers and allow loss-making tech companies, which do not have sufficient cash flow, to access debt markets. Both iQIYI and Bilibili are in the red, but are seen as growth prospects. iQIYI priced its latest bonds at just 2%.
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Investor sentiment towards Chinese companies has improved as the Chinese government has indulged in a huge spending spree to stave off a sharp economic slowdown, and as the U.S.-China trade war appears to be nearing a conclusion. Those factors have lifted shares in the hugely profitable tech giants Alibaba and Tencent. New York-traded Alibaba is up 36% so far this year, more than double the S&P 500 index. Tencent is up 18% since the beginning of January, managing to beat the 16% overall gain in Hong Kong’s Hang Seng Index, of which it is a major component.
Despite a final quarter of 2018 profits drop, Tencent shares have staged a spectacular recovery. They are up 48% since October, when its regulatory problems in the games sector seemed to be at their worst. With games approvals now again flowing, the media, tech and streaming giant looks to be on a more solid footing.
That more positive outlook may even be rubbing off on its competitors. While iQIYI’s ADR shares have yet to return to the highs of June 2018, at $23.98 apiece, they remain comfortably ahead of their $18 IPO price. And iQIYI’s latest bond issue is significantly cheaper than its first post-IPO try at the debt market. In November last year iQIYI sold $750 million of convertible bonds with an indicated yield of 3.75%.
At current prices Alibaba has a market capitalization of $462 billion, and Tencent $456 billion (HK$3.58 trillion). Post-merger Disney is currently valued at $202 billion.