As the Game is Getting Bigger, Tencent Writes the Largest Asia Technology USD Bond

Chinese tech giant Tencent Holdings Ltd has completed a $2.5 billion dual-tranche bond sale in the US on April 22, making it the firm’s largest U.S. debt deal to date. This is also the largest ever tech bond from Asia (ex-Japan) and the largest offshore bond sale by Chinese companies that are not state-owned.

The deal is part of the companies medium-term notes (“MTN”) program established earlier this month to enabling it to issue up to $5 billion in bonds over the next year, providing a more flexible financing scheme for its potential buyouts in the further. The deal splits into 3-year and 5-year tranches.

According to a source close to the deal, one of the key objectives of the MTN program is to attract US investors, particularly long-term buy-and–hold asset managers. Luckily, the holistic marketing efforts of Tencent in the past few months has largely paid off, with 2/3 of the 5-year bonds sold to US-based funds, and 80% of the smaller 3-year deals.

Tencent, which operates the popular WeChat mobile messaging app, is known for its dominant position in China for messaging, gaming, social networking and e-commerce portal. According to Dealogic, Tencent has already made 9 acquisitions this year, including acquiring stakes in e-commerce site JD.com, South Korean games maker CJ games, and logistic company China South City. It is believed that Tencent’s acquisition binge is to compete with its domestic rival Alibaba and expand to overseas markets at full speed. Together with the bond issuance, it is most certain that Tencent will keep engaging in a more holistic expansion plan globally.

The bond issuance comes at a time when Chinese firms are not only increasingly looking to overseas investors for funding needs, but also planning out a more globalized strategy. However, breaking out of China brings many levels of challenges for local Chinese tech companies. Tencent has been trying to expand WeChat to the US market with various promotional campaigns that have cost more than $200 million as of the end of 2013, including opening a U.S. office and a TV commercial starring football star Lionel Messi to be aired in 15 countries.

Tencent also announced back in January its arrangement with Google, which rewards a $25 Restaurant.com Gift card to users who connect their WeChat accounts with Google accounts and add five contacts. It is also rumored that WeChat has employed people stationed in France to oversee the European marketing campaigns.

Industry insiders believe that this is a step in the right direction, however monetized rewards alone won’t be an incentive strong enough to acquire a reasonable market share. Functionalities that are tailor made to overseas users are of the key components needed to attract attention.

Additionally, WeChat will continue to face intense competition from its overseas rivals: Whatsapp, Line, Kakaotalk, who all dominate in different parts of the world with a substantial pre-existing user base, let alone the cultural and regulatory barriers WeChat has to face when playing the “made in China” card.

Before WeChat manages to reach critical mass in these markets, things are likely to go slow and Tencent itself is aware of this. That is why WeChat has been positioning itself as an open platform in the recent years – connected and open to all sorts of social networking portals. As of the end of 2013, WeChat’s reported monthly active users were 355 million. Statistics from GlobalWebIndex suggested that 78 million of these were overseas users.

The strong financial position of Tencent is one of the reasons that its US bond has received an A- credit rating by Standard & Poor’s. As of the end of 2013, Tencent achieved annual revenues of $10 billion, leaving a $2.9 million free cash flow and a total gross profit over $1 billion.