It’s unclear how long the company will remain unprofitable
Debt investors in ride-share company Uber Technologies UBER, -2.41% got a nice lift on Friday from the company’s new $1.2 billion bond sale.
Strong demand for the high-yield bonds allowed the company to borrow more than its initial $750m target on Thursday, while paying investors yields of 7.5%.
By Friday, holders of the bonds saw yields fall as low as 7.291% in trading and prices as high as 101 high, according to trading and data platform MarketAxess.
Not a bad gig, if you can get it. Although, before Uber’s $8 billion initial public offering in May, Uber bond deals were limited in scope, with its earnings, revenue and other financial projections treated as closely-guarded secrets.
“The first bond deal in October last year wasn’t widely marketed and was only shown to a select group of investors,” said Matthew Kennedy, senior portfolio manager at Angel Oak Capital Advisors, in an interview with MarketWatch.
The new debt offering was well known to the market, Kennedy said, and followed a more typical, if shorter one-day, marketing process.
Part of the quick pace came as investors piled some $2 billion of orders into the debt offering, which ultimately included new backers for Uber, said a person familiar with the matter who wasn’t allowed to speak publicly about the private debt placement.
Importantly, unlike prior Uber debt, the new bonds likely will be eligible for inclusion in the sector’s benchmark high-yield bond indexes, the person said.
The could mean the sector’s two biggest exchange-traded funds SPDR Bloomberg Barclays High Yield Bond ETF JNK, -0.17% and iShares iBoxx $ High Yield Corporate Bond ETF HYG, -0.18% which tend to track benchmarks, will give individual investors their first taste of exposure to Uber debt.
JNK ended Friday 7.93% higher on the year to date, while HYG gained 7.47%, which put both ETFs roughly 12% behind the S&P 500 index SPX, -0.07%.
Riskier assets rallied this week, leaving both the Dow Jones Industrial Average DJIA, +0.14% and S&P 500 on Friday within striking distance of fresh all-time highs after Sino-American trade tensions eased and the European Central Bank cut key rates and relaunched its bond purchase program in an effort to shore up the eurozone economy.
S&P gave Uber’s debt offering CCC+ ratings, while Moody’ s rated it one notch higher at B3, both of which are only notches away from being designated “imminent” default risks.
The financing is a clear win for Uber, which said proceeds would help fund its planned acquisition of Middle East-based hide-sharing company Careem for $3.1 billion in a buyout that is expected to close in January 2020, according to S&P.
Still, it shows increased appetite among debt investors betting on companies sorting out their place in the future.
“We’re not adverse to looking at credits that are currently not generating profits and are build-out stories,” said Ken Monaghan, co-director of high yield at Amundi Pioneer, in an interview.
“But it requires a higher level of due diligence. You are making assumptions about how long it’s going to take for a company to be profitable.”
Uber faces “intense competition in all of its servicing lines” and high regulatory risks, “including from the potential reclassification of independent drivers and freelancers to employees in various regulated regions,” Moody’s said in its evaluation of the new bond offering.
Uber and Lyft LYFT, -1.89% both vowed this week to fight a California bill to extend labor protections to “gig” workers.
Moody’s also said it expected Uber to face another two to three years of operating losses and cash burn.
Uber’s shares closed at $33.25 apiece on Friday, down 20% on the year to date, according to FactSet data.