Baidu raised $1.5bn last week, selling the first SEC-registered bond from a Chinese company in more than a decade. The success of the deal provokes the obvious question: why have there not been more? Some 60 Chinese companies have listed in the US in the last three years, according to Dealogic. But none of them have attempted an SEC bond.
The benefits of doing such a bond are obvious. SEC registration offers unfettered access to US investors, many of which have limits on 144A or Reg S supply. Companies can attract new accounts and expect more appetite from their existing ones, including big institutional investors buying on behalf of retail clients.
SEC-registered deals are eligible for the Barclays Capital US Aggregate Bond Index, which acts as a benchmark for many US accounts and helps secure the participation of the largest funds. And, as if more benefits were needed, secondary trading is more transparent.
This list should be attractive enough in itself, but the benefits combine to impact the most eye-catching factor for issuers: tighter pricing. This is not just relevant for a one-off deal, but should also show in the future.
SEC registration is a public commitment to abide by a set of stringent rules for as long as a deal remains outstanding. That gives investors a lot of confidence, and means the SEC stamp is valuable even if you are not issuing frequent bonds in the market, but instead raising funds elsewhere.
The benefit of restrictions
It is not, of course, a possibility for all — or even most — mainland companies. There have been many questions raised about corporate governance in China, and it is hard to see many small companies being ready to meet the onerous disclosure requirements of the US Securities and Exchange Commission. But for big companies, and for those already listed in the US, it is a natural route.
The process comes with risks. The SEC has suspended trading in the securities of several Chinese companies this year, after they didn’t file their documents on time. It accused another of fraud for inflating its financial results. These moves show that, as appealing as the benefits of SEC registration might be — they come with a real burden.
But the strengths and the weaknesses of the system are intertwined. Chinese companies may have to be willing to meet tough disclosure rules, but in doing so they show their lenders, and investors elsewhere in the world, that they are dedicated to transparency.
There are plenty of Chinese companies already listed in the US. It is time they went one step further — and made sure that there is not another decade before the next SEC-registered bond from a Chinese company.