Prosus is raising USD5.25 billion in debt

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Prosus is raising USD5.25 billion in debt

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Published Date: 2022-01-14 | Source: INCE|Community | Author: The Finance Ghost

Prosus is raising USD5.25 billion in debt

Prosus lives off the dividends from Tencent and uses that money to invest in growth sectors (Classifieds, Food Delivery, Payments, FinTech and EdTech) or to return money to shareholders e.g. via share buybacks. There's also a very expensive management team and head office structure that gets a slice of the action from those cash flows.

The group has a Global Medium-Term Note Programme, which allows it to raise funding through the issuance of notes. These are debt instruments and come at a much lower cost than the "cost of equity" - the return that shareholders demand from Prosus.

Companies use debt in a capital structure to effectively turbocharge the equity returns. This is known as financial leverage. A related but different concept is operating leverage, which is the use of fixed costs rather than variable costs to help drive profitability as a company scales.

In other words, Prosus' funding mix is a combination of the Tencent dividends and cash raised from debt.

Prosus is raising USD5.25 billion this month under its Global Medium-Term Note Programme. There are various tranches that will be issued, which carry different rates and have different maturity dates.

The dates range from 2026 to 2052 (yes, you read that correctly). By the time Prosus repays that final tranche, I'm hoping the Chinese narrative would've improved and I'll be back in the green on my Alibaba shares.

The rates range from 1.207% on the 2026 notes through to 4.987% on the 2052 notes. This is the "yield curve" in action, with longer-dated debt carrying a higher cost.

Prosus highlights that its credit rating was upgraded by S&P in December to BBB. It has a Baa3 rating from Moody's. In both cases, these are investment grade ratings but only just. Below that, the debt would be classified as speculative grade.

The big question is: what will Prosus buy next?





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