This "Alibaba's Bonds Dilemma: Location, Timing, and Pricing" case study is about the development of universal financial institutions with a strong fintech component. The dilemma for Alibaba was on where to issue the bond --- in China or in the US. And, was it a good time to issue the bonds? This case study allows students to decide on where to issue the bonds, when to issue them, and how much should the bonds be.
Harvard Business Review (W17088-PDF-ENG)
February 21, 2017
Case questions answered:
- Should Alibaba issue the bonds in the U.S. or China?
- How does financing with bonds differ from Alibaba’s previous forms of debt financing with syndicated loans?
- Discuss different risks Alibaba is facing?
- Is it a good time for a company to issue bonds?
- How would you price Alibaba bonds?
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Alibaba's Bonds Dilemma: Location, Timing, and Pricing Case Answers
Alibaba’s Bonds Dilemma: Location, Timing, and Pricing Case Study
This “Alibaba’s Bonds Dilemma: Location, Timing, and Pricing” case study is about the development of universal financial institutions with a strong fintech component.
1. Should Alibaba issue the bonds in the U.S. or China?
Alibaba should issue the bonds in the U.S. Although there are advantages and disadvantages of either decision that management should consider.
For one, there are risks that U.S. investors will be wary of given the company’s reliance on the strength of the Chinese economy and the possibility of regulatory challenges. For example, the Chinese government restricts foreign direct ownership in specific industries, such as Internet content providers.
Some Chinese companies, including Alibaba in the company’s 2014 IPO, can circumvent this through Variable-Interest Entities (VIEs), in which the VIEs hold the licenses to do business in China and pay fees and royalties to offshore holding companies based on the contractual agreement between the two.
Now, while it seems that this structure will remain reliable (insofar as the Chinese government will continue to allow it), the risk of the Chinese government changing its policies to harm capital providers remains a possibility.
A benefit of issuing in the U.S. is the extraordinarily low rates that sprung from the Fed’s response to the 2007-2008 financial crisis. The ability to take advantage of the low-rate environment by tapping a class of U.S. investors that is hungry for yield is undoubtedly a beneficial consideration. U.S. issuance always comes with exchange rate risk and trust in the People’s Bank of China (PBOC) to maintain a firm policy of fixing the Chinese yuan’s exchange rate with the U.S. dollar.
While this risk is noteworthy, the internationalization of the yuan was accelerating, and other Chinese companies at the time, including Baidu, Inc. and Tencent Holdings Ltd., overcame this with bond issuances of their own.
Finally, the company’s investment-grade ratings, including an A+ from Standard & Poor’s and Fitch, suggest that the company is relatively high quality and would receive reasonable pricing.
2. How does financing with bonds differ from Alibaba’s previous forms of debt financing with syndicated loans?
Alibaba had previously raised funding through syndicated loans in 2012 and 2013. These loans varied in duration, with maturities ranging from one year to five-year from issuance, and were syndicated by underwriters/banks ranging in number from five to nine. The 2012 loans summed up to $4 billion, and the 2013 loans totaled $8 billion.
The floating rate of these loans was based on the London interbank Offered Rate (LIBOR). The proceeds from these syndicated loans were utilized for various purposes, including share buybacks (that were privately held, such as the stake once owned by Yahoo!). Bond financing would differ in a number of ways from the syndicated loans that Alibaba had previously utilized.
For one, syndicated loans are generally…
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