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Monday, 3 December 2012 - China's dot-com darlings tap cheap global credit |
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      Edition: U.S. Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Home Business Business Home Economy Technology Media Small Business Legal Deals Earnings Social Pulse Business Video The Freeland File Aerospace & Defense Investing Simplified Markets Markets Home U.S. Markets European Markets Asian Markets Global Market Data Indices M&A Stocks Bonds Currencies Commodities Futures Funds peHUB Dividends World World Home U.S. Brazil China Euro Zone Japan Africa Mexico Russia India Insight World Video Reuters Investigates Decoder Politics Politics Home Supreme Court Politics Video Tech Technology Home MediaFile Science Tech Video Tech Tonic Social Pulse Opinion Opinion Home Chrystia Freeland John Lloyd Felix Salmon Jack Shafer David Rohde Nader Mousavizadeh Lucy P. 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See the best of Reuters photography.  See more | Photo caption  Surrealism of Sandy The altered landscape in the aftermath of Sandy.  Slideshow  Photos of the week Our top photos from the past week.  Slideshow  Sponsored Links China's dot-com darlings tap cheap global credit Tweet Share this Email Print Related News UPDATE 3-AIG, others to take up half of China PICC's $3.6 bln HK IPO Wed, Nov 21 2012 UPDATE 4-China PICC in talks with AIG as buyer for $4 bln HK IPO Thu, Nov 15 2012 Analysis & Opinion Is it time to rightsize Detroit? HK exchange plays it safe with equity finance Related Topics Tech » Media » Employees walk past the logo of Baidu outside its headquarters in Beijing, December 15, 2010. Credit: Reuters/Soo Hoo Zheyang By Umesh Desai and Pete Sweeney HONG KONG/SHANGHAI | Sun Dec 2, 2012 4:06pm EST HONG KONG/SHANGHAI (Reuters) - Chinese search engine company Baidu Inc paid a lower interest rate than Google Inc when it sold $750 million in 10-year bonds last month. China's three dominant dot-com names - Baidu, Alibaba and Tencent Holdings Ltd - have successfully tapped global funding this year, stockpiling a combined $6 billion in debt despite investor skepticism about opaque Chinese companies. The big three plan to use the money to pad their industry advantage at home, to compete better abroad, and perhaps to buy cash-starved rivals. Ultra-low interest rates on U.S. government bonds, the benchmark against which most debt is measured, have driven down borrowing costs around the world. That has been a boon to corporate borrowers who are finding plenty of yield-hungry investors willing to extend long-term credit. "The mature guys, Alibaba, Tencent, Baidu, these guys need to fund new growth. They are incredibly dominant in China, so they need to expand into international markets and create new products," said Sean O'Rourke, an analyst at Shanghai-based Redtech Advisors. O'Rourke said the money that Baidu raised in November - a total of $1.5 billion in 5- and 10-year bonds - would be more than enough to buy some of its smaller rivals, and said there were "dozens" of potential takeover targets. While Baidu said it intends to use this tranche of funds for cross-border acquisitions, it could potentially spend it on buying domestic competitors that have listed abroad. Baidu's bond sale was notable both for its size and its reception in the market, which has been skeptical of U.S.-listed Chinese companies after a rash of accounting scandals. The hurdle was especially high for Baidu because it lacks the physical assets bond investors prefer, and it was seeking a 10-year term, which is a lifetime for a technology firm. Yet it managed to sell the debt at a yield of 3.518 percent, just 185 basis points over the risk-free rate that is normally associated with U.S. Treasury bonds. Google sold 10-year bonds in May 2011 with a yield of 3.734 percent. Treasury yields have fallen since then, so if Google were to tap the market now it might obtain a lower rate. IPO NO GO The bond market embrace comes at a good time for technology companies because corporate the governance scandals have all but shut down another popular funding avenue - listing of shares on U.S. exchanges. Just two Chinese technology companies have successfully launched U.S. initial public offerings this year, including newly listed YY Inc. That's down from 15 in 2011 and way off the 41 issues in 2010. These IPOs have raised only $153 million this year, compared with $2.17 billion last year and $4.01 billion in 2010, Thomson Reuters data shows. By contrast, Tencent and Baidu raised $2.1 billion via bond issues this year, while Alibaba has raised a massive $4 billion in loans. "It's a lot faster and simpler to raise bonds - raising equity would result in share dilution and takes a longer time," said Thomas Chong, Internet analyst with BOCI Research in Hong Kong. Chong said the companies were keen to borrow even though their balance sheets are loaded with cash because they need U.S. dollars but their revenue is primarily in yuan. Tencent is expected to nearly double its free cash flow in the current year to 18.3 billion yuan ($2.94 billion), according to Nomura. Baidu's free cash flow this year is estimated to hit 8.0 billion yuan, Credit Suisse said in a report. China's tax laws provide another incentive to borrow in the international credit markets. If Chinese companies use domestic cash to repay foreign borrowing, they would have to pay a remittance tax of as much as 10 percent, said Catherine Chan, head of investor relations at Tencent. "Raising offshore capital to repay offshore loans through bonds issues will help optimize our tax obligation while allowing us to take advantage of the higher deposit rates in China by parking cash generated from our operations onshore," she said. SIZE MATTERS Credit investors and analysts doubt that the positive reception afforded to China's tech giants will trickle down to smaller players whose prospects may be less certain. That means debt markets won't replace IPOs. Many Chinese Internet companies could use cheap bond funding right now, especially those in gaming and e-commerce. But the lesser known firms are eyed suspiciously because they lack solid assets and their cash flows are unpredictable. "It will take some time to educate the bond market about Internet companies, given we are usually asset-light and have a shorter track record than traditional brick-and-mortar industries," said Tencent's Chan. Even for established names, market perceptions can change rapidly: Yahoo lost 80 percent of its market capitalization since its Internet peak in 1999 while Google's stock has risen more than six-fold since its stock market debut in 2004. "If you look at the rapid rate of changes in technology and consumer behavior, I would be concerned about holding debt in the longer term. You could, for instance, have some new platforms or delivery medium emerging and taking over from these sites," said Tim Jagger, Singapore-based portfolio manager at Aviva Investors. (Additional reporting by Melanie Lee in Shanghai; Editing by Emily Kaiser) Tech Media Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints   We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above.   Edition: U.S. Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Back to top Reuters.com Business Markets World Politics Technology Opinion Money Pictures Videos Site Index Legal Bankruptcy Law California Legal New York Legal Securities Law Support & Contact Support Corrections Connect with Reuters Twitter   Facebook   LinkedIn   RSS   Podcast   Newsletters   Mobile About Privacy Policy Terms of Use AdChoices Copyright Our Flagship financial information platform incorporating Reuters Insider An ultra-low latency infrastructure for electronic trading and data distribution A connected approach to governance, risk and compliance Our next generation legal research platform Our global tax workstation Thomsonreuters.com About Thomson Reuters Investor Relations Careers Contact Us   Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests. NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

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