* Tech company sells bond only to American investors
* Deal offered better terms than Asians would require
* Past experience has taught Baidu to rely more on US
By Neha D‘Silva
SINGAPORE, Aug 5 (IFR) - A US$1bn bond issue from search engine Baidu last week showed that US investors remain the biggest fans of the Chinese internet sector - at least when it comes to debt.
Baidu, headquartered in Beijing, shunned Asian investors, announcing and pricing the 10-year SEC-registered deal entirely in US trading hours.
Asian fund managers were left with no choice, but to chase the deal in secondary, pushing up the price of the bonds the following day.
“The issuer was keen to position the credit as a high-grade credit, rather than the EM Asia credit. I think US high-grade investors understand this and price appropriately. They didn’t want the pricing to be impacted by emerging-market Asian accounts that would probably price it differently,” said a banker close to the deal.
In targeting only US buyers, bankers suggested, Nasdaq-listed Baidu paid less for its debt, having ensured it was compared to the likes of Google or eBay rather than Hong Kong-listed Tencent Holdings, China’s biggest listed internet company and the benchmark for technology bonds in Asia.
The tactic, however, also reveals the gulf in pricing expectations between fixed-income investors in Asia and the US. This, in turn, raises questions over whether or not a Chinese company with few tangible assets and a complicated corporate structure should expect the same treatment as its US peer.
“US investors may know the sector better, given there are Google and Yahoo for comparison,” said the head of credit research at a major asset manager in Singapore.
“What they don’t know [I believe] is the bond structure. In Internet bonds, especially in China, there are VIE structures in place, not to mention subordination risks, as well,” he said, referring to the use of variable interest entities to allow foreign owners to control onshore businesses.
Although common in China, especially in regulated industries like communications, the structure has attracted criticism from some regulators and its legal status remains unclear.
Baidu is not the first to ignore Asian investors and get a better deal. Last year, South Korea’s Samsung Electronics sold a five-year bond that sported one of the lowest coupons in history for a private corporation from Asia as US investors took up 90.6% of the deal.
Baidu may have also learned from its own experiences. In its November 2012 debt market debut, even though the books were open in Asian hours, investors in the region found the pricing too tight as the comps used were US companies. Ultimately, the deal hinged mostly on investors in the US, while those in Asia chose to sit it out, only to watch the bonds rally in secondary trading.
This time around, the company did not even bother to engage investors in its home region.
“Its peer group comprises US tech companies and it had a select number of conference calls with US accounts ahead of the announcement of the transaction. So, this was always going to be a transaction that saw a large percentage of bonds allocated to US accounts,” said another banker on the deal.
If it had offered the bonds to Asian investors first, Baidu may have had to pay higher yields. Asian fund managers last year looked at the bonds of Baa1/A- rated Tencent as a pricing benchmark. At A3/A, Baidu is rated one notch higher, but Asian accounts still felt it should pay a similar premium to Tencent.
Given that Tencent’s bonds were quoted at a G-spread of 195bp when Baidu returned last week, the 190bp the company achieved on the new bond would have sounded too tight.
For US investors, however, it looked generous. As the Baidu 2017s were at a G-spread in the high 160s, the premium offered at the final spread was attractive to US investors.
Those concerns, however, did not stop Asian investors from buying in the secondary market. As soon as Baidu’s bonds were free to trade in Asia, they tightened 6bp and traders could not find enough sellers for the buyers.
”Asian investors have never been comfortable with the technology sector and, as such, they tend to overprice the risks,“ said another portfolio manager in Singapore. ”US investors, on the other hand, assume the world is like the US and tend to underprice certain risks.
“The truth lies somewhere in between.”