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Bonds

Tencent becomes an unlikely beneficiary of US tax cuts as it sells US$5 billion of bonds

PUBLISHED : Thursday, 18 January, 2018, 12:07pm
UPDATED : Thursday, 18 January, 2018, 10:44pm

China’s Tencent has become an unlikely beneficiary of US tax cuts. Investors stateside snapped up more than half of a recent US$5 billion bond sale by the tech titan, IFR reports.

That’s partly thanks to Republican tax cuts, which are likely to result in fewer bonds from American tech stalwarts. That helps the gaming and social media outfit lock in cheap overseas funding.

On Friday, the US$537 billion group sold its largest offshore bond yet. Following arch-rival Alibaba’s US$7 billion issuance two months ago, Tencent is taking advantage of low rates.

Yields on benchmark US Treasury bonds may not be quite as rock-bottom as 18 months ago, but they are still low, and the premiums investors charge for assuming corporate credit risk are slim too. So all-in borrowing costs are still very reasonable.

Thus, the company was able to sell 10-year debt yielding 105 basis points more than equivalent US Treasuries, down sharply from the initial guidance of 130 basis points. That’s roughly in line with the 108 basis point-spread Alibaba paid in November, and translates to a yield of just under 3.6 per cent.

Tencent can thank US-based investors, who helped push demand up to more than US$40 billion, according to IFR.

A landmark tax reform bill, approved by the US Senate in December, will lower corporate taxes and spur Apple and others to repatriate their huge reserves of offshore cash. For stateside funds, that will probably mean fewer tech bonds, which US giants have relied on to fund dividends and buy-backs. So the timing of Tencent’s mega-offering could hardly be better.

China’s trio of tech giants - Baidu, Alibaba and Tencent - stand out from typical corporate issuers in the People’s Republic, who usually turn to Asian buyers to raise dollars. The international ambitions and sheer size of the “BAT”, coupled with general euphoria about tech, lets them tap investors further afield. With a supply-demand imbalance now in their favour, and a need for hard currency to do big overseas deals, Tencent’s two counterparts could be raising more dollars before too long.

CONTEXT NEWS

- Chinese gaming and social media group Tencent has sold its largest offshore bond to date, raising US$5 billion. The deal, which priced on January 12, included bonds with maturities of five, 10 and 20 years. The company says it will use the proceeds for general corporate purposes.

- More than half of the bonds were placed with investors in the United States, according to IFR, a Thomson Reuters publication. Deutsche Bank, Bank of America Merrill Lynch and HSBC were joint global coordinators, alongside 11 other bookrunners.

- The 10-year bond, due January 2028, carries a coupon of 3.595 per cent and was priced to yield 1.05 percentage points more than equivalent US government securities.

- Rival Alibaba in November sold $7 billion of debt, including a 40-year bond, the longest fixed-maturity paper issued by a Chinese company.

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