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Sunday, 19 November 2017

Asia-Pacific Loan

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Open sesame: It is not easy at the best of times for an asset-light, privately owned Chinese company to make a debut in the capital markets. For the blowout response to a complex financing with multiple moving parts, Alibaba Group’s US$3bn dual-tranche financing is IFR’s Asia-Pacific Loan of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

When Alibaba Group first approached lenders about a US$4bn loan in late 2011 it was fraught with market and execution risks, with the eurozone crisis in full flow and the Asian loan market reeling from the retreat of European lenders.

Furthermore, any misstep could have jeopardised the M&A deals the borrower was pursuing – a privatisation of its Hong Kong-listed unit, Alibaba.com, and a buyback of part of the 40% stake Yahoo held in the Chinese e-commerce giant.

The loan not only navigated tough markets, it also had to manage uncertainty around the privatisation, since the company needed certain funding but could not be sure that shareholders would vote in favour of the delisting. Alibaba was also in negotiations with Yahoo, and struck a deal to buy back half of the latter’s 40% stake for US$7.1bn in early May, adding a further twist to its financing needs.

The borrower’s asset-light nature posed a challenge to lenders in Asia, which typically prefer to lend against hard assets. Moreover, there were virtually no precedents in Asia for lending to internet companies.

The biggest hurdle, however, lay in the fact that Alibaba was a privately owned company with its operations and revenues primarily derived in China. The loan, borrowed via an offshore entity, could only be serviced with the dividends the onshore operating companies paid out annually.

While there was a precedent for the so-called offshore China structure – Home Inns & Hotels Management’s US$240m four-year acquisition financing that was underwritten in 2011 – that deal was significantly smaller.

Early resistance

In December, when Alibaba’s debt adviser Rothschild asked lenders for US$1bn underwriting commitments and target final holds of US$400m, the response was muted, and by mid-January, Alibaba cut the deal by US$1bn to US$3bn to attract lenders.

Meanwhile, in late December, the company hired a Washington lobbyist to address any US political opposition to the deal, amid speculation that Alibaba and other investors planned to take over Yahoo completely.

By early February, six banks were forming the arranger group for a US$3bn loan, split between a US$1bn, three-year term facility and a US$2bn, 12-month bridge. However, instead of funding the buyback from Yahoo, about US$2.5bn of the loan would go towards privatising Alibaba.com.

A couple of weeks after the privatisation was announced, Credit Suisse, Deutsche Bank, ANZ, DBS Bank, HSBC and Mizuho provided underwritten commitments of US$500m each – impressive since market conditions were far from conducive for taking on underwriting risk.

Success was far from guaranteed as there had been a dearth of Asian big-ticket M&A financings in 2012. Yet, senior syndication closed in mid-June to a blowout response, with 13 other lenders committing a combined US$2.5bn, making general syndication unnecessary.

Especially eye-catching was the response from Taiwanese lenders. Known for taking small tickets on deals from non-Taiwanese borrowers, Alibaba’s financing was the first where they committed big amounts, with six of them taking a combined US$706m.

There would have been one more Taiwanese lender had the terms not changed following Alibaba’s US$7.1bn buyback transaction with Yahoo, announced in mid-May. Loan documentation and structure were amended to allow Alibaba to incur an additional debt of US$1bn at a later date, if required.

The factors contributing to the strong response were a watertight structure (dividend maximisation, low gearing, bridge-cum-term loan split), the short tenor (blended average life of 1.5 years) and the rich pricing (blended top-level all-in of 604.67bp).

Moreover, China Development Bank stepped up as an equal lender on a bilateral basis, meaning the bridge facility had a certainty of takeout, which allowed foreign lenders to commit on a separate US$1bn, four-year term loan soon after.

Prakash Chakravarti

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