Bff 5300 - Alibaba’s Bonds Dilemma Location, Timing and Pricing

Alibaba’s Bonds Dilemma: Location, Timing and Pricing

1. Introduction

Alibaba is the largest e-commerce company in China. This company operate online shopping website and online retail outlet and provide financial services and search engine service to its customers. After completing the largest initial public offering in New York Stock Exchange history, this company is preparing itself for an additional round of capital fundraising. This time, Alibaba wants to issue a large amount of bonds.

1. Analysis

1. Risk and impact

Alibaba has high profit margin (44.4%), ROE (27%), and ROA (60.9%). At the same time, this company control dominant market shares and has few competitors, so the business risk of Alibaba is very low. Due to the reasonable D/A ration (36.8), current ratio (1.81), and quick ratio (1.21), meanwhile, the proceeds from the bonds issue can be used to repay the syndicated loan and will not affect the leverage, the financial risk of Alibaba is very low too. Business risk and financial risk will not affect the debt issue.

Alibaba faces high political risk. Because Chinese government restricted foreign direct ownership in Internet content providers, Chinese companies must use variable interest entities (VIEs) to invite foreign investment while staying within the Chinese law. However, Chinese government want to change its neutral attitude to VIEs. If government thinks VIEs does not comply with PRC licensing, registration or other requirements, the bonds and stocks hold by foreign investors may be influenced by Chinese government, and it will be more difficult for Alibaba to issue the bond.

Exchange risk is also important for Alibaba. Most of Alibaba’s business is in China, and this firm can earn RMB. However, Alibaba will raise funds in USD, so they must exchange RMB for USD when they repay the debt. If the Federal Reserve increase the interest rate in United States, USD may appreciate, so Alibaba needs to use more RMB to repay its debt.

1. Difference between debt issuance and syndicated lending

A syndicated loan is a loan offered by a group of lenders. When the loan is too large for a single lender or a project needs a specialized lender with expertise in a specific asset class. Syndicating make lenders spread risk and take part in financial opportunities that may be too large for their individual capital base. Interest rates on this type of loan can be fixed or floating, based on LIBOR.

Corporate bonds do not be offered by some lenders, they are issued by a corporate and sold to variety of investors. Do not like syndicated loan, bonds can trade in decentralized, dealer-based, OTC markets. Interest rates of bonds are determined by credit rating. Higher credit rating, lower the interest rate.

1. Changes of capital structure

From Exhibit 1, it is obvious that the D/A decreases in 2014 compared with that in 2013. Because Alibaba files with the U.S. Securities and Exchange Commission to go public, most of capitals become equity. Prior to IPO, the D/A ratio is 51.9%, which means Alibaba needs to repay much debt in the future, but after IPO, the D/A ratio is 36.8%, the pressure from repayment to Alibaba becomes lighter. Lower D/A ratio causes that the firm has lower leverage, so the risk of Alibaba decreases.