Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Shareholders of JD.com, China's second-biggest online retailer, had a bad start to the week. The stock dropped as much as 10 percent after the company reported flagging sales growth amid an economic slowdown. Painful, but arguably not as bad as what its creditors have been going through.

Less than a month ago, Beijing-based JD.com raised $1 billion selling its first dollar-denominated bonds in a two-part offer. The $500 million of notes due 2026 already hold a couple of unhappy records. On their second day of trading, the yield premium over Treasuries increased by about 40 basis points, one of the worst performances ever for investment-grade U.S. currency debentures from China. Within two weeks, the securities' spread had risen by 70 basis points to a high of 290.6 basis points, earning them the dubious honor of the very worst first two-week performance by the dollar debt of any similarly rated Chinese company.

Whoops
JD.com's first-ever dollar bonds haven't been a hit
Source: Bloomberg

The bonds' credit rating may hold the key to their lackluster track record. Both Moody's and S&P scored JD.com one notch above junk. Fitch, which didn't officially rate the company, took the rather unusual step of issuing a report saying JD.com didn't have an investment-grade credit profile due to its low profits and weak cash generation. Yet when they were issued, the 2026 notes were at a premium of only 65 basis points to notes of Alibaba due 2024, and they're rated A1 by Moody's, well above the Baa3 the firm assigned to JD.com.

Fitch also pointed out that over the past three years, JD.com has had negative or zero operating margins. JD.com's first-quarter numbers released Monday showed a negative 0.5 percent operating margin, which, at least for Chief Financial Officer Xuande Huang, must have been something of an achievement, considering he highlighted the ``32 basis-point improvement over the same quarter last year.''

Negative Bent
JD.com's never reported a positive operating margin, and analysts don't expect that to change in the near future
Source: Bloomberg
* Denotes estimated margins by analysts surveyed.

One of the biggest drags on JD.com has been its finance unit. Established in 2012, it offers business and consumer loans and distributes wealth-management products. It's yet to turn a profit and according to Moody's, its rapidly growing loan book, combined with low transparency, could pressure JD.com's credit score. Still, Moody's justifies its investment-grade rating in part because of China's fast-growing Internet market.

S&P takes a similar stance, noting that the ``stable outlook on JD reflects our expectation that the company will maintain its good business growth and improve the margins of its core online retail business over the next 12 to 24 months, despite intense market competition.''

In other words, JD.com's growth prospects were key drivers for the investment-grade score it got. But that shouldn't have spurred bond investors to buy its debt. Creditors don't care about growth, they want to know that a company is able to pay back its debt, whether it's increasing sales or not. And negative margins certainly aren't reassuring when it comes to meeting obligations.

JD.com shareholders were offered some reprieve Tuesday when the stock clawed back a little of this week's losses, closing 1.5 percent higher. Any relief for bondholders still looks a way off.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net