Structured Equity Issue: Alibaba Group Holding’s US$5bn convertible bond
Reviving sentiment
Chinese e-commerce giant Alibaba Group Holding’s record-setting US$5bn convertible bond drew global investors’ attention back to Chinese technology companies, showing that a well-structured deal could help comfort investors about regulatory and geopolitical risks.
Fundraisings from Chinese tech issuers have slowed and company valuations have plummeted since domestic regulators tightened scrutiny over the sector in 2021.
But with stock markets in the US, Japan and India trading at elevated levels, the focus has slowly started to shift back to relatively undervalued Chinese stocks.
Riding on the renewed appetite, NYSE and Hong Kong-listed Alibaba on May 23 launched a seven-year put five convertible bond of US$4.5bn with a US$500m greenshoe. The deal was marketed at a coupon of 0.25%–0.75% and a conversion premium of 30%–35% over the reference price of US$80.80.
The offering, which was Asia Pacific’s largest international convertible bond, immediately drew enormous attention, and demand, from investors worldwide.
Alibaba had been focusing on buybacks to help bolster its flagging stock price, with a massive US$35.3bn share repurchase programme running through to March 2027.
The CB was cleverly structured to complement that. It came with a concurrent share buyback which allowed Alibaba to repurchase around US$1.2bn of shares from CB buyers who hedged through delta transactions.
Alibaba also spent US$637.5m to enter capped call transactions, which effectively pushed up the CB’s conversion premium to 100% and minimised potential dilution. Banks, as call spread counterparties, also needed to buy Alibaba’s stock to hedge their positions.
The simultaneous stock buyback and call spread overlay also eased the selling pressure on Alibaba’s shares caused by CB investors’ short selling needs, and investors liked the fact Alibaba was using the remainder of the proceeds for its share repurchase programme which could help boost shareholder returns.
The deal drew whopping demand, with around US$25bn of orders from more than 250 investors including global outright investors, long-only accounts and hedge funds. US investors contributed around 80% of total demand.
The upbeat demand allowed the deal to be priced at a 0.5% coupon and a 30% premium. The greenshoe was fully exercised.
Shares in Alibaba rose 0.6% to US$81.26 the day following the transaction, with the CB changing hands at 101 in the secondary market.
Alibaba had to execute the buyback on its ADRs as at the time the Stock Exchange of Hong Kong only allowed issuers to conduct buybacks in public markets, but following the success of the deal the exchange allowed direct buybacks in private transactions with investors on a case-by-case basis.
Citigroup, JP Morgan, Morgan Stanley, HSBC and Barclays were the bookrunners.
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