A-The rationale for the listing of Alibaba in the A-share market of China:
Alibaba has recently announced plans to list its stock in its home country after three years of going for IPO in New York Exchange. The company is expected to get listed in the China stock exchange this year if China changes its securities rules. This listing would not only benefit the Chinese stock exchange but also help Alibaba in having options for raising money and aid in boosting its profile in its home country (Deagon, 2018).
The Chinese investors have significantly missed out on the gains of the rise of Alibaba on its historic IPO in NYSE in 2014. The stock of Alibaba has almost tripled from its last IPO price. The regulators in China are now working to provide the foreign trading Chinese companies option to list at home. It provides a rationale for the Alibaba to list on the A-share market in China (Yu, 2018). It is true that some difficulties are present in trading of US stocks in the China mainland markets, however, if it can be achieved, the turnover is going to be huge.
B-Rationale and Feasibility for Alibaba Financing in the Bond market:
The financing of Alibaba was done in 2014 by selling of the largest bond that has been done by any Asian company ever through an $8 billion to six tranche offering. The pricing of the bond shows that the company was able to get away from paying the Chinese premium. The analysts believed that the company bonds pricing did not reflect the Chinese risk premium and was more priced like a US credit as the company was facing strong demand from its US investor base and also from the strong hype created around its first IPO (Natarajan & Chiglinsky, 2014).
The orders topped the 24-hour three different time-zoned book building at $57 billion before settling at $55 billion. The major portion of the investment was taken by the US investors who grabbed nearly three-quarters of the notes. The Alibaba bonds priced at $1.5 billion 7-year tranches were priced at 115bp over the treasuries and the $2.25 billion 10 years was priced at 128bp over. The company was successful in achieving tight pricing as it was positioned away from China. The Asian investor’s orders were allocated 15 to 20% of the notes which exceeded $11 billion of the trenches. The bond was generally expensive for the Asian investors as they have another alternative Chinese credit which offer higher premiums (Chan, 2014). This premium is paid due to the China Discount which is generally driven by the headline risk and other technical aspects (Ho, 2017).
Alibaba bonds were relatively fairly priced regarding the US market, however, were expensive regarding the Asian credit market. An $8 billion deal was achieved to repay the syndicated loan that is of similar size. The deal was divided into a three year note of fixed rate of 70bp over the treasuries of $ 1 billion, 1.625%, and three year floater over three-month LIBOR at 52 bp of $300 million, seven-year, $1.5 billion of 3.125% at 115bp over, 10 years $2.25 billion at 3.6% at 128bp over and a twenty year $700 million at 148bp at 4.5% (Lianting, 2014).
C-Current Debt Structure:
The debt structure of the company as shown in Exhibit 1 shows that the Debt to Assets declined in 2014 as relative to the year 2013. As the company has filed at US SEC, the major portion of capital is in equity form. However, before the IPO, the Debt to Assets ratio is 51.9% that shows that the company has still to pay its debt in the future. After the IPO, the company debt to asset ratio is 36.8%, which shows the pressure on the company from repayment has lightened. The declined Debt to Asset ratio shows the lower leverage of the firm consequently showing lower risk for Alibaba.
Alibaba has been listed on the New York Stock Exchange, and its capital structure consists mainly on Private Equity Capital and Syndicated Loan capital. The capital structure was composed of the equity investors and debt lenders (Reuters, 2018). The current portion of the liabilities of Alibaba Group in June 2018 was $2118 Million while the long-term debt and capital lease obligation for June 2018 was $19242 Million. The equity of the company was $60,802 Million. The debt-to-equity ratio for the quarter of June 2018 has been 0.35. This debt-to-equity ratio shows that the debt portion has been lower as compared to the equity portion of the financing (GuruFocus, 2018).
D-Risks Alibaba faces on its Debt Issuance:
1-Volatility Risk:
The Alibaba Company is facing a high risk of technological changes which has a negative impact on the business value of Alibaba. Technology is one of those things which are always changing. This constant change in technology needs the company to adapt to the new changes and consequently change its strategies. These affect the valuation of the business as well, making it difficult for the investors to have an exact value for making informed decisions (Homaifar, 2004).
2-Currency Risk:
By entering and dealing in many new markets, Alibaba which is originally a Chinese VIE operates in the markets of Hong Kong, London, US, and Singapore. Having operations in foreign countries exposes Alibaba to the currency risk and its main parent currency is different from the subsidiary company’s currency.
3-Economic Risk:
Alibaba is also exposed to economic risk as it is operating in different economies. The economy of China is different as compared to the economy of Hong Kong, London and Singapore this exposes it to economic risks. Trading laws, interest rates on debt and tax rates are various factors which cause the economic risk for Alibaba (Frenkel, Hommel, & Rudolf, 2013).
Impact on Debt Issuance:
Due to the high volatility risks, bond pricing is affected. The changing valuation of the company due to the changing technological needs causes difficulty in assessing what price for bonds should be better. It also affects the timing of the bond issuance as well. The management team desires to have the best time for the issuance of the bond. However, with the constantly changing valuation of the company, it is difficult for the management to estimate the right time for issuance of the debt. The economic risk also impacts the price and timing of the debt issuance. The place of the issuance affects given it represents the economy. The currency risk also affects the pricing of the debt issuance as the company has to penetrate in various foreign markets where the different currency is regulated, giving difficulty in the determining of the debt price.
With a high profit margin (25.5%), return on equity (19.8%) and return on Assets (10.46%), and dominant control on the market shares and comparative few competitors, the business risk for the company is comparatively low. With its reasonable financial leverage ratio (1.96) the proceeds of the issuance of the bonds can be utilized for the repayment of the syndicated loan and would not have an impact on the leverage. The company does not pose serious business and financial risk (Morningstar.com, 2018). However, as mentioned, some other significant risks are apparent.
References:
Chan, R. (2014, November 21). Asian investors chase long-dated Alibaba bonds for higher yields. Retrieved from https://www.scmp.com/business/companies/article/1645170/alibaba-dollar-bond-draws-us55b-orders-pricing-tight
Deagon, B. (2018, March 15). Alibaba Listing In China Would Fuel New Opportunities For Investors. Retrieved from https://www.investors.com/news/technology/alibaba-listing-in-china-would-fuel-new-opportunities-for-investors/
Frenkel, M., Hommel, U., & Rudolf, M. (2013). Risk Management: Challenge and Opportunity. Springer Sciences & Business.
GuruFocus. (2018). Alibaba Group Ltd. Retrieved from https://www.gurufocus.com/term/deb2equity/BABA/Debt-to-Equity/Alibaba%2BGroup%2BHolding%2BLtd
Ho, J. (2017, November 29). Alibaba revisits global bond market with multibillion-dollar issue. Retrieved from https://asia.nikkei.com/Business/Banking-Finance/Alibaba-revisits-global-bond-market-with-multibillion-dollar-issue
Homaifar, G. (2004). Managing Global Financial and Foreign Exchange Rate Risk. John Wiley & Sons.
Lianting, T. (2014, November 21). Investors Are Treating Alibaba Like It Isn’t A Chinese Company. Retrieved from https://www.businessinsider.com/r-alibaba-prints-jumbo-deal-without-china-premium-2014-11
Morningstar.com. (2018). Alibaba Group. Retrieved from https://www.morningstar.com/stocks/xnys/baba/quote.html
Natarajan, S., & Chiglinsky, K. (2014, November 21). Alibaba Sells $8 Billion of Bonds in Company’s Debut Sale. Retrieved from https://www.bloomberg.com/news/articles/2014-11-20/alibaba-sells-8-billion-of-bonds-in-company-s-debut-sale
Reuters. (2018, March 23). Alibaba is planning a China listing by mid-2018 via the use of Chinese depositary receipts. Retrieved from https://www.scmp.com/business/companies/article/2138606/alibaba-planning-china-listing-mid-2018-use-chinese-depositary
Yu, X. (2018, February 2). China wants local investors to have a share of the success of its US-listed tech giants. Retrieved from https://www.scmp.com/business/companies/article/2131745/china-wants-local-investors-have-share-success-its-us-listed-tech.
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