Why did iQIYI Raise Money?
On Friday, March 29th, Chinese video streaming platform iQIYI announced it had closed its convertible bond offering of $1.2 billion. It is a six-year deal, and one of the largest bond offerings ever for a U.S. listed Chinese stock.
I’ll talk about the potential upside and downsides of a large debt deal, but first let’s talk about what convertible bonds are, as it is important to know the nuances when evaluating a deal like this.
Convertible bonds are a special typed of fixed-income security that can be converted into equity. This conversion option means that at a certain point during the bond’s life, the bondholders have the option to convert their holdings into a specified amount of stock if the price hits a certain target. For this specific deal, the strike price is $40.02, a 75% premium from iQiyi’s current stock price.
Generally, convertible bonds have a lower interest rate than traditional ones, which is beneficial to the company selling them. iQIYI sold these bonds at a 2% coupon rate, which is a significantly better rate than what they got on previous rounds. If you’re still confused about what exactly convertible bonds are, you can get a deeper explanation on Investopedia.
Why This is Good for iQIYI
The main reason they did another debt raise is because iQIYI is burning tons of cash at the moment. In 2018 they had a net loss of $1.2 billion, and, with only $1.9 billion in cash equivalents on the balance sheet, would be on pace to run out of money in 2020.
A $1.2 billion infusion will allow iQIYI to continue sacrificing profitability for top line and user growth, something they have been quite good at since going public. In 2018 they grew their subscribers 72% to 87 million, putting them on pace to pass video streaming king Netflix in 2020 or 2021.
Why This is Bad for iQIYI
Two things come to mind as negatives when doing a convertible bond offering. The first is, like with any bond, more debt is being added to iQIYI’s balance sheet. More leverage means more risk, and if revenue or user numbers start to slow, it could mean big trouble for the growth stock.
The second but less serious consequence of a convertible bond is the potential for share dilution. When this happens shares of iQIYI will be worth less, albeit not by much.
Overall, I believe in this stock’s growth story and think it is a potential monster in the making. I think this bond offering is a good move, and anyone that sold or is worried about their shares should relax and look at the top line and user numbers.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.