Tencent Raising $6 billion in Bond Sale

Apr 4, 2019
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Tencent Holdings Ltd. Has issued $6 billion in bonds issued despite having $20 billion in cash already.

The Bond Details

Tencent (HKG:0700) issued the bonds with maturity dates spread out over the next 30 years, with $2 billion maturing in 5 years, $3 billion in 10 years, and $500 million in 30 years. The coupon rates range from 3.280 percent to 4.525 with the rate increasing as the term does. The puzzling news about this is Tencent already has $20 billion in cash on hand, so raising another $6 billion likely means that Tencent is going to start spending more money in the short term and may have big plans that investors are not fully aware of yet. Tencent is only a 20-year-old company, so issuing 30-year bonds although not unprecedented is rare, especially with a low premium over 7 and 10-year bonds. The company said they intend to use the cash to pay for debt maturing in May and use the rest for general expenses.

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This news comes after they issued a statement to increase their Global Medium Term Note Programme limit to $20 billion from $10 billion.
Tencent notes the reason for increasing the programme as:

The Company currently intends to use the net proceeds from each issue of the Notes to be issued under the Programme for the Company’s general corporate purposes. If, in respect of any particular issue, there is a particular identified use of proceeds, this will be stated in the applicable Pricing Supplement.
Deutsche Bank will arrange the programme for Tencent.

When they increased the Programme Tencent was obligated to list the risks associated with their business, of these issues one of the most pressing was actually getting their games to market. Tencent can go through the work of creating new games, but the People’s Republic of China needs to approve every game that is released to the market first. They also listed that:

“The internet, telecommunications, and other related industries are highly regulated Regulations issued or implemented by the State Council, MIIT, MOC,SAPPRFT and other relevant government authorities cover many aspects of our telecommunications, Internet information and other related services, including entry into the telecommunications industry, the scope of permissible business activities, licences and permits for various business activities and foreign investment.”

Finally, another concern they outlined that is important to global financial markets is the current macroeconomic condition of the markets they operate in. The maturation of the Chinese economy has caused a slowdown in growth, which affects their advertising division the most. We have extensively noted of a yield curve inversion in the U.S. Treasury Bonds, which typically indicates economic uncertainty, and was a good indicator of the 2008 recession. We recently reported that Tencentis partnering with Razer to optimize for their mobile devices showing further outreach into the global market. The company is already very well diversified digitally with partial ownership of Epic Games and titles like Clash Royale and PUBG Mobile, subjecting them to global conditions as well as the Chinese market conditions.

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