APAC REVIEW: Tencent Music Entertainment hits the right note for investors

It was a productive first day in the office for Tencent Music Entertainment Group (TME Group) which received a very enthusiastic response from investors for its inaugural US$-denominated bond issue on Wednesday.

The largest music streaming platform in China, TME Group is majority owned by Chinese technology giant Tencent Holdings Limited (A1/A+/A+) which has a 55.6% stake in the group, and is rated once notch below its parent at A2/A/A (all stable).

"The A2 issuer rating incorporates Tencent Music's underlying credit strength and a two-notch uplift, reflecting the high likelihood of the company receiving strong support from its parent, Tencent Holdings Limited (A1 stable), in times of need", noted Moody's Investor Service.

WeChat ban fails to dampen interest

The timing of TME's maiden transaction was interesting in the wake of recent headlines surrounding Chinese social media platform WeChat, which is also owned by Tencent Holdings Limited, and has over 1.2 billion users worldwide, including a large number the United States.

That prompted US President Trump in early August to sign an executive order which effectively banned the use of the WeChat app in the US, due to what were deemed to be national security concerns.

That was met with resistance from some big US corporations including Disney, Apple Inc and Walmart among others, who maintained that the ban would dampen their competitiveness in the world's second largest economy.

Meanwhile, a group of WeChat users, calling themselves The WeChat Users Alliance, revealed that they are suing the Trump Administration in the wake of the President's order to ban the app which they described as unconstitutional.

They alleged that the ban unfairly targeted the Chinese community in the US, many of whom regularly use WeChat to communicate with friends and family in China.

Since then Washington has been seeking to reassure US companies that they can
still do business with the WeChat messaging app in China, realizing that the impact of an all-out ban could be devastating for US technology, retail, gaming, telecommunications and other industries, according to a Bloomberg report.

These developments, along with wider ongoing simmering tensions between Washington and Beijing, clearly didn't dampen the eagerness of investors to lock-in offshore fixed income exposure to TME Group at the first available opportunity, however.

Having presented its credit story through global investor calls in Asia, Europe and the US earlier in the week, the borrower opened the books on the dual-tranche SEC-registered senior unsecured offering on Wednesday morning in Asia.

Initial price thoughts were announced at T+155bp area on the 5-year tranche and at T+180bp area on the 10-year.

That sparked a bun fight for paper, with the combined order book ballooning to over US$10bn at reoffer, thanks to solid demand from accounts spanning the three regions, weighted slightly in favour of the 10-year tranche.

That in turn paved the way for TME Group to place a US$300m 1.375% Sep 2025 tranche at T+110bp and a US$500m 2.0% Sep 2030 tranche at T+135bp, having tightened both tranches by 45bp during execution.

Full distribution statistics of TME Group's deal are outlined in the following graphics:

Source: Informa Global Markets (IGM)

Source: Informa Global Markets (IGM)

Source: Informa Global Markets (IGM)

Economic funding costs

Parent company Tencent Holdings Limited was last in the dollar market in May this year with a jumbo US$6bn 4-part 144A/RegS transaction, which included a long 5-year and a 10-year tranche. The TENCNT curve was as follows shortly after the TME Group books officially opened.

Based on bid levels taken from the screens on Wednesday morning in Asia:

TENCNT US$1.250bn 3.280% Apr 2024 @ T+101 / G+109 (issued Apr 2019)
TENCNT US$900m3.800% Feb 2025 @ T+105 / G+108 (issued Feb 2025)
TENCNT US$1.000bn 1.810% Jan 2026 @ T+110 / G+106 (issued May 2020)
TENCNT US$3.000bn 3.975% Apr 2029 @ T+130 / G+140 (issued Apr 2019)
TENCNT US$2.250bn 2.390% Jun 2030 @ T+128 / G+131 (issued May 2020)

Pinpointing fair value on the new TME Group deal was challenging and something of a discovery process for the inaugural name, according to a source close to the deal.

Nevertheless, looking only at the valuations of the most recent TENCNT Jan 2026s and Jun 2030s, and adding on an additional 10-15bps to account for Tencent Music Entertainment Group's one notch inferior rating and any further concession that may be required to accommodate its inaugural issuer status, indicates fair value on the new 5- and 10-year lines is in the T+115bp and T+145bp ball park. That also factors in slight adjustments in the curve to provide for the modest differences in maturity versus the comps.

That in turn implies that both tranches priced with negative new issue concessions of ca. -5bp on the 5-year tranche and ca. -10bp on the 10-year, according to IGM analysts' calculations.

Placement statistics and new issue concessions on parent company Tencent Holdings Limited's US$ issuance:

Source: Informa Global Markets (IGM)

Source: Informa Global Markets (IGM)

Positive secondary performance

The blowout demand for the TME Group offering has also been reflected by a positive secondary market performance, where the 5-year tranche was bid ca. 6bp inside reoffer at T+104bp while the 10-year had tightened ca. 2bp to T+133bp bid, as of Thursday afternoon in Asia.

Joint-bookrunners and joint lead-managers on the transaction were BofA Securities, J.P Morgan, Goldman Sachs Asia L.L.C and Morgan Stanley. Other Joint lead-managers were Bank of China (Hong Kong), Credit Suisse, Deutsche Bank, HSBC and Mizuho Securities.