Only a handful of the most widely-recognised Asian companies will be able to replicate Baidu’s dollar bond deal as the lack of brand familiarity and capital restrictions in their respective countries may make little economic sense for others to follow.
Baidu, which is China’s largest Internet search engine, is set to become the first Asian non-financial corporation to issue a dollar bond that complies with US Securities and Exchange Commission (SEC) rules. The deal will be at least US$500 million and issued in two tranches that are shorter than 10 years, according to a banker with knowledge of the deal.
The deal, which bankers say is expected to price on November 19, will require stricter company disclosures compared with a 144a format such as a list of the company’s long-term debt obligations, adjusted Ebitda and other risk factors.
That makes these deals longer and costlier to complete than a 144a or RegS deal, but opens the company to US retail investor funds.
“You open up your investor market. There are a number of investors who can take SEC registration that won’t take 144a. You basically broaden the distribution network and that gives you both more scale and probably assistance on pricing as well,” said a senior rival debt banker.
Although their SEC-compliant deal may save Baidu about 40 basis points on interest payment costs, according to another rival banker, these circumstances will be limited to the top-rated Asian brands that US investors are familiar with.
“US investors will demand higher premiums if they are rated lower. Highly rated names that have ADRs [American Depositary Receipts] trading in the US are generally more comfortable with a good credit and will be easier to obtain information on the company,” said the banker. “Baidu has the double benefit of being the largest search engine in China and is a known name to US investors.”
Asian companies that are rated at least ‘A-‘ or ‘BBB+’ would be at the lower limit of investor comfort. Baidu’s dollar-denominated notes were rated ‘A’ by Fitch and ‘A3’ by Moody’s. Investor feedback on the road show has been positive, according to a banker with knowledge of the deal, but investors will need to be persuaded about whether Baidu will be able to maintain their stronghold of the Chinese Internet search market.
“You have a lot of market share, 85%. Can you continue to monetise that and generate a free cash flow that you have to be a sound credit as you are? Being ‘A’/‘A3’, you are the highest-rated Chinese enterprise in the private sector, so your ability to maintain that will need to rely on your business model, whether you are really a true Google in China,” said the banker.
Fitch says the outlook for the company is solid.
"The A rating means this company’s credit fundamentals are strong both in terms of operation and financial profile,” added Alvin Lim, a credit analyst at Fitch. “They have a massive amount of positive cash flow every year and they are also a market leader in China with 85% market share. We don’t foresee a deterioration of the credit profile in the short- to mid-term. They didn’t really need the cash, given its solid net cash position, but it’s more for improving their flexibility in the capital structure because the dollar is so cheap.”
Baidu pays its vendors in US dollars so borrowing in the currency at low rates would be cost-effective as they continue to expand their data centres in China, added Lim. Baidu has US$500 million in loans coming due in 2013.
Having ADRs listed on a US stock exchange will cut the process shorter for an Asian company to sell SEC-compliant bonds, but that will only take the company halfway there. For example, capital restrictions in China will make it more difficult to move dollars in and out the country.
“I don’t think we’re going to see a trend here [for more SEC-compliant bond deals]. If it’s for M&A or building a war chest, we can potentially see more issuance. Unless you need to raise dollars there doesn’t seem to be much use of proceeds,” said another rival banker.
“If they’re doing it to fund onshore activities it is very hard to bring it back to China. Similarly a lot of these businesses are becoming cash cows in China. And it’s hard to take the money out.”
Another issue that serves as an obstacle for ADR-listed Chinese companies to issue SEC-compliant bonds is the deteriorating US sentiment in investing in some of these names.
“There’s a bunch of smaller guys obviously in trouble and there is a lot of scrutiny about Chinese-listed companies on the Nasdaq,” said the banker.
For example, organic fertiliser company China Agritech was delisted from the Nasdaq in April 2011 after investors who were betting against the stock accused the company of having no real operations.
In a separate issue, China’s solar equipment maker JA Solar is also in danger of being delisted from the Nasdaq after the US Department of Commerce’s decision to impose anti-dumping duties on China-produced solar products caused its ADRs to fall to less than US$1 on October 11, according to Reuters.
Baidu kicked off a roadshow in Hong Kong on November 7. Together with bookrunners Goldman Sachs and J.P. Morgan, the company will be meeting investors in Singapore, London and New York, according to bankers familiar with the deal.
The Republic of the Philippines, Korea Finance Corp. and Export-Import Bank of Korea are the only other issuers in Asia excluding Japan and Australia that have printed SEC-compliant bonds, according to Dealogic.