INTERNET – Speculators Gobble Up Alibaba Bonds
Bottom line: Strong demand for Alibaba’s newly issued bonds testifies to its popularity among investors, especially short-term traders, and the debt is likely to see high trading volumes before activity settles down next year.
It seems that anything with the Alibaba (NYSE: BABA) name is in huge demand these days, with word that a massive $8 billion bond offering by China’s leading e-commerce company was massively oversubscribed. To put things in perspective, the previous largest bond program by a Chinese Internet firm came earlier this year from social networking leader Tencent (HKEx: 700), which announced plans to raise up to $5 billion. But unlike Tencent, which had to sell the bonds in several offerings over a few months due to the big amount, Alibaba has been able to easily sell its entire $8 billion offering in a single shot.
Like Alibaba’s blockbuster IPO just 2 months ago that raised $25 billion, this particular bond deal also broke a record by becoming the biggest-ever dollar-denominated corporate bond from a Chinese company. The previous record holder was the stodgier Bank of China (HKEx: 3988; Shanghai: 601398), which raised $7.5 billion in its own bond offering just last month. This frenzy of corporate cash raising reflects the big amount of western cash in the market looking for investments, and also the current big demand for Chinese investment products.
I do think these bonds look like a reasonably safe bet, since Alibaba is unlikely to default on any of the debt that carries terms of up to 10 years. But people more knowledgeable about this kind of thing also point out that Alibaba is paying a premium that is much lower than one would normally expect compared to much safer products like US treasuries. That would seem to indicate that people buying the debt aren’t interested in the yield of the bonds, and instead are probably just hoping to sell it quickly at higher prices to make some quick profits.
All that said, let’s take a closer look at this massive debt offering by China’s Internet giant, whose market value is now at a stratospheric $273 billion based on the big jump in its share price since its record-breaking September IPO. Sources said the offering was oversubscribed by more than 7 times, with $57 billion worth of orders coming in. (English article) The strong demand allowed Alibaba to get more favorable terms on the offering than it originally planned.
Alibaba’s plans for the money weren’t too exciting, with the company previously saying it would use much of the money to refinance current debt. That’s probably the best strategy for Alibaba right now anyhow, since the company is already overloaded with cash, with nearly $18 billion in its coffers at the end of September.
So, what else can we say about this bond offering besides yet another “congratulations” to founder Jack Ma for generating such strong demand for his company’s debt? There’s not really much left to say about Alibaba, since I’ve already said that it’s almost certain to repay the debt with very little risk of default.
From an investor’s perspective, I do think that this debt will quickly become the plaything of hedge funds and other short term investors looking to make a quick profit. That’s what’s already happened to Alibaba’s stock, which is currently up 62 percent from its IPO price despite a recent pull-back that has seen the shares drop 8 percent from an all-time high last week. Prices for the bonds are likely to see equal volatility as they get rapidly bought and sold by speculative buyers. I do expect that trading and prices will probably settle down as we head into 2015, after which time buyers will have to settle for relatively low yields compared with debt from other Chinese companies.
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