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China tech

Baidu braves market tumult with bond issuance

China internet search company's plan hits as market activity quietly resumes

Baidu is expected to use the proceeds to get around China's capital outflow controls and redeem offshore bonds.   © Reuters

HONG KONG -- Chinese internet search company Baidu intends to tap debt markets with five-year and 10-year dollar-denominated bonds, a sign of rising investor appetite for corporate credit despite the coronavirus outbreak.

Baidu is offering an initial yield guidance of around 312 basis points over the equivalent U.S. Treasury, according to a term sheet seen by Nikkei. That compares with the current spread of about 259 basis points over Treasurys for a five-year Baidu note issued in 2018, which was sold at 162.5 basis points.

A benchmark-size offering generally means at least $500 million, but the exact size will be determined after tallying up investor interest, according to a person familiar with the transaction, which could be launched as early as today. Baidu announced the offer in a regulatory filing on Tuesday in the U.S.

Credit markets have picked up pace even as the Coronavirus pandemic closes down swathes of the economy. Investors put in bids worth five times the record $110 billion in bonds on offer last week in the U.S. In Europe there was similar demand for 75 billion euros ($82.4 billion) of bonds on offer.

While Asian credit markets have been quiet, activity is picking up among companies in the region with Pinduoduo raising $1.1 billion through a private placement and companies trickling back to initial public offerings.

Baidu, which has $750 million in bonds maturing in June, plans to use the proceeds of the bond sale to repay debt and for general corporate purposes, according to a regulatory filing. The company had cash and cash equivalent of $4.8 billion as at the end of 2019, according to its annual report.

Since most of Baidu's revenue comes from the domestic market, the company might find it difficult to use its reserves to redeem offshore bonds due to Beijing's capital outflow controls, said Martin Bao, an internet analyst in Shanghai with ICBC International.

"The bond issuance seems to be a sensible refinancing strategy for Baidu. It does not indicate anything wrong about its business," Bao said, citing the company's healthy cash flow and widely expected recovery in the second half of this year.

"Chinese internet companies like Baidu are also the darling of international bond issuers, thanks to their low default risks," Bao said. "I don't see any problems facing Baidu to attract subscribers."

The company, which in February postponed its fourth-quarter results by more than a month amid the coronavirus epidemic, said revenue for the three months ending March 31 will decline by between 5% and 13% from the year-ago period, with revenue from its core search business falling by between 10% and 18%.

More than 42,000 people have died from the virus since the outbreak began in Wuhan, China, late last year. The World Health Organization referred to it as a pandemic on March 11. The crisis is set to send the global economy into a recession, with authorities unveiling trillions in stimulus and liquidity to limit the damage and keep markets functioning smoothly.

Goldman Sachs and Bank of America are the joint book runners of the offering.

Additional reporting by Nikkei staff writer Coco Liu.

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