Dahua Approves $760 Million USD Debt

The interest rate may be not high for Dahua to issue bonds, which means it is a good time. If they get loan from bank, the interest rate will be much higher.

Dahua has not announced this interest rate to the bond, but another company LongYuan (00916.HK) issued 270 days RMB bond for 2 billion RMB a week ago, the rate is 2.77%. quite low.

because loan rate from bank on average for big companies with high rating is about 6%.

which means, Dahua can do nothing but just loan the 5 billion RMB out for 6% to market and gets 3.23% interest in return ( assume zero cost).

So this news just means Dahua gets cheap money from bubble economy.

In plain English, this bond should be called the "inter bank short-term bond". It is not for the public, and can only be purchased by banks, insurance companies and institutions that are permitted to trade in the inter bank market in China.

Typically, the interest rate would look better than the rate from the bank loan. The rate is primarily based on SHIBOR and the credit rating of that company.

Dahua does not have a credit rating from a 3rd party credit rating agency before. So they will have to do it for this bond. Based on Dahua's financials, it is likely to get something above "AA". That means the interest rate for the inter bank short-term loan would be at least 100 basic points lower than the bank loan rate for the same duration. Somewhat savings for Dahua. On average, it is 200 basic points lower than the bank loan rate.

In terms of cons of pros of this type of debt financing, well obviously, it is a kind of direct debt financing in the currency market, since it often connects the buy-side players, such as the insurance companies and the pension funds with the borrower. And yes, on average, it is cheaper than the bank loan. Fast approval and flexibility of terms are other benefits.

Comparing to the cost of equity financing, many factors come into play. Essentially, we are comparing the cost of equity (calculated from the CAPM model or the dividend model) and the after-tax cost of debt (weighted average or a specific debt; it is after tax, since interest expense decreases pre-tax income).

We don't really know the cost of equity for Dahua. So, can't draw any conclusion about whether this bond is a cheaper deal then equity offering. But we do know that the board and the independent board directors approved this bond.