China Mobile Why Did China

China Mobile

Why did China Mobile feel it was necessary to issue equity in markets outside of its home base in Hong Kong? What are the advantages of such a move?

China Mobile moved quickly in order to build its presence within the Chinese mainland and purchased $32.8 billion in assets from its parent company.

In order to complete the transaction China Mobile needed to raise funds to finance the transaction. There were strong fears amongst China Mobile's investors about the company issuing more shares and creating an overhang in the market. The company needed to appease these investor concerns so that it can move forward with raising the necessary capital to acquire more networks in China. The Hong Kong capital markets would not be able to absorb a bond/debt offering of this scale without causing a significant increase in the cost of capital for China Mobile. Meanwhile, since China Mobile was already trading in the U.S. through its American Depository Reciepts (ADRs), it made sense for the company to issue more debt in the United States which would be a larger market ready to absorb the size of the China Mobile transaction, as witness by the oversubscription of the China Mobile offering.

Why did China Mobile price the bond issue in U.S. dollars instead of their home currency?

Two factors are likely to enter into a company's choice of currency for a bond issue: those relating to risk management, and those relating to borrowing costs. The rationale of a bond issuance in another country's currency tends to be greater for strong currencies, for those boasting higher long-term bond yields, and for those where home country demand for funding is high.

The exchange rate and interest rate effects seem to result primarily from changes in currency denomination choices on the part of borrowers which are not issuing in their home currency.

Strong exchange rates and high yields may be taken by investors as a signal that investment returns in those currencies are likely to be higher in the near future.

China Mobile's $12 - $15 billion bond offering was divded into multiple traunches and sold in multiple markets across the world. A majority of the bonds were sold in the U.S. But given the size of the offering the company would not have been able to price it in Hong Kong dollars due to the exchange rate at the time. One must also examine the exchange dynamics between the Chinese Yuan and U.S. Dollar, as the Yuan continues to be artificially held at predetermined rate and not allowed to float in the public market.

Can you see any downside to China Mobile's international equity and bond issue?