Baidu, Automakers In New Fundraising

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 |  Includes: BIDU, TCTZF, TM, VLKAF
by: Doug Young

Some interesting new fund raising is taking place at opposite ends of the corporate universe in China, with plans coming from Internet giant Baidu (NASDAQ:BIDU) and automotive stalwart Volkswagen (OTCPK:VLKAF). One move will see Baidu potentially issue a major new bond, while VW will raise money by issuing yuan-denominated securities backed by its China-based auto loans.

While these 2 plans are quite different in nature, they do collectively reflect the growing number of options available to foreign investors looking for different kinds of exposure to the China market. It’s also worth noting that these options will bring new types of risk, especially as China’s economy shows signs of slowing that could lead to growing defaults from local governments, companies and even consumers.

All that said, let’s take a look at the latest China-focused fund raising starting with Baidu, the nation’s leading search engine that has embarked on a multibillion-dollar acquisition spree over the last year. Baidu has just announced that it filed with the US securities regulator to sell senior notes. (company announcement) No details were given on the size of any potential offering, and the announcement only says that funds will be used for general corporate purposes.

It’s interesting that Baidu is registering for such a plan, since it doesn’t seem to have any pressing need for cash. According to its latest quarterly results, the company had a whopping $6.4 billion in cash and cash equivalents at the end of the first quarter, which should be more than enough to help finance any additional M&A for the next year or two.

Baidu’s new filing comes less than 2 years after it raised a sizable $1.5 billion through another bond offering. (previous post) That deal was followed by a series of similar bond issues by many of China’s top Internet companies, including the most recent plan by leading Internet firm Tencent (OTCPK:TCTZF) to issue up to $5 billion in new bonds. (previous post)

We’ll have to see how much Baidu ultimately decides to raise from this new filing, and it’s quite possible the company won’t announce any new plans in the immediate future. Perhaps we’ll see Baidu, Tencent or one of the other big Chinese Internet players announce a major global acquisition later this year, as that’s the only immediate use I can see for so much fund raising.

Meantime, let’s look quickly at Volkswagen, which is planning to raise a more modest 800 million yuan ($130 million) through the issue of securities backed by its Chinese auto loans. Volkswagen’s move, which was disclosed by an unnamed source, follows similar moves by rival automakers Ford (NYSE:F) and Toyota (NYSE:TM), which each sold 800 million yuan worth of similar asset-backed securities earlier this year.

The fact that the fund-raising size is identical in all 3 of these cases indicates the companies are coordinating closely with Beijing as part of China’s drive to internationalize its currency. The relatively modest size of their fund-raising, combined with backing from such major automakers, means these new ABSs are likely to find strong demand from international buyers.

The proposed Baidu bonds and the Volkswagen ABSs both look like relatively safe bets, though it’s worth pointing out that each could quickly become risky for different reasons. Baidu is almost certain to follow recent trends and issue bonds that can be converted to its stock. That means investors could be disappointed if the company’s stock price stagnates over the next few years. Meantime, buyers of the car loan-backed securities could also face some risk if China’s economy continues to slow and consumers start facing difficulty paying off their loans, causing some to default.

Bottom line: Baidu’s potential new bond offer and a yuan-denominated ABS from Volkswagen reflect a new range of China-based investment products, presenting new options but also risks for western buyers.

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