Baidu sells US$1 billion of bonds amid China tech crackdown

[HONG KONG] Baidu Inc sold US$1 billion of bonds in a two-part sustainable deal, according to people familiar with the matter, marking the first major global debt offering by a Chinese tech firm since Beijing escalated a crackdown on private enterprise.

The Internet search giant, an investment-grade issuer, priced 5.5-year and 10-year notes at 83 basis points and 113 basis points, respectively, above comparable Treasuries, said the sources, who asked not to be identified because they are not authorised to speak about it publicly.

Spreads on the 5.5-year bond tightened as much as seven basis points on the secondary market on Thursday, according to credit traders, while the 10-year note widened by about three basis points amid broader market pressure in the longer end of the curve.

The deal is the investment-grade issuer's first US dollar bond of this year, with the US$1.95 billion of such notes sold in 2020 offering much bigger premiums.

Asian borrowers have benefited from a rally in credit markets since unprecedented fiscal and monetary stimulus introduced last year. The spread on a Baidu US dollar bond maturing in 2026 bond has contracted 22 basis points this year, according to Bloomberg-compiled data, in line with the average tightening for all Asian investment-grade US dollar bonds.

The firm earlier received a US$1 billion bond sale quota from the National Development and Reform Commission, China's top economic planning agency. Borrowers can choose whether or not to use the full amount.

Planning to use the proceeds for general corporate purposes and debt repayment, Baidu is spending heavily to reposition itself as an artificial intelligence company with use cases in everything from ride-hailing to smart speakers and the cloud.

Based on Baidu's outstanding bonds, CreditSights analysts including Joel Liauw estimated in a report that fair value is at 1.63 per cent for the 5.5-year note and 2.42 per cent for the 10-year, respectively offering premiums of 85 and 114 basis points.

Nomura International Hong Kong analyst Clare Guo said ahead of the pricing that there was better value in the 10-year bond versus the 5.5-year tenor.

While Baidu so far has not been one of the main targets under Beijing's campaign to rein in big tech, the clampdown on for-profit after-school tutoring will likely restrict the spending power of some key ad clients.

"There will be some level of risk premium from the China tech crackdowns that Baidu will have to pay," said Kaveh Namazie, senior credit analyst at Australia & New Zealand Banking Group. "Baidu historically has a fair amount of demand from the US, and they may see some reduction there given recent headlines from last two months. But for a company like Baidu, they will still have sufficient demand to do the deal."

Offshore bonds sold by China's major tech firms have enjoyed robust demand in recent years, with strong support from both local and US buyers. Xiaomi's offering in July, for example, attracted more than US$7 billion of orders, even as regulators moved to increase scrutiny of the industry.

BLOOMBERG