Issuer of the year

IFR Asia Awards 2012
8 min read
Timothy Sifert

In a year when public equity markets were far from their best, one company managed to raise nearly US$8bn and complete its strategic objectives against the odds. For executing a unique financing scheme and making use of new markets and investors, Alibaba is IFR Asia’s Issuer of the Year.

Issuer of the year 2012

Alibaba Group had big plans for the year under review. On the slate were a take-private of, a buyback of Yahoo-owned shares and, what ultimately made it all possible, about US$8bn in debt and equity financing. It was a menacing to-do list that looked almost impossible in the face of mercurial funding markets.

In executing the plan, the e-commerce giant exemplified everything successful fundraisers had to be during the year – determined, open-minded and creative. Alibaba executives were able to see opportunity where others could not.

That sort of thinking epitomised the against-the-grain ethos that had been the hallmark of Alibaba and its founder, Chinese ecommerce pioneer Jack Ma, since the company’s inception in 1999.

Here was an asset-light Chinese internet company looking to raise billions of dollars in loans, while the markets were moving away from bank loans and from Chinese risk.

Banks were lending less because tougher regulations had increased their cost of capital, forcing them to be highly selective when it comes to lending money. Discerning lenders had little reason to buck up for an internet company that made most of its money in capital-restricted China – under almost any regulatory conditions, let alone these ones.

And there was more to it. Alibaba had interests in California, Hong Kong and the PRC, each with conflicting timetables, regulations and outlooks. The company had to get them all to agree to a plan that, in any event, market conditions and new ideas forced them to change regularly. The European credit crisis in the background only made investors and banks more sensitive to risk.

Yet, by the middle of September, Alibaba had raised US$4bn in loans and US$3.9bn in privately placed convertible preference and ordinary shares. was privatised, Yahoo had halved its stake and put in writing its plans to exit completely once Alibaba Group went public.

The Hangzhou-based company’s experience in the public and private capital markets came in handy. Alibaba made its initial foray into Asia’s public markets with the HK$11.5bn (US$1.5bn) Hong Kong listing of business-to-business unit in 2007. It was the largest technology IPO to price in the city, a superlative that Ma’s successes in the competitive international private equity market foreshadowed years earlier.

In August 2005, it coined the private-market deal with Yahoo that, along with the IPO, would ultimately be the subject of its 2012 funding scheme. Yahoo got a stake of roughly 40% in Alibaba Group in exchange for the California-based search engine’s China business and US$1bn in cash.

Bigger plans

In 2011–12, as the world’s capital markets became more unstable, Alibaba’s plans got bigger.

In early December, the company, with the help of Rothschild, its adviser, went to the bank market for a US$4bn loan to buy back part of Yahoo’s 40% stake. It would be the first sizable syndicated loan for a Chinese technology company.

The loan, however, turned out to be a mere rough draft of its ultimate 2012 funding plans. As its corporate plans changed, its financing needs did, too.

In early February, the company named six banks for a US$3bn financing of Yahoo shares, including a US$2bn bridge and a US$1bn term loan. It scaled down its US$4bn target, in part, to get banks more comfortable with its businesses.

“Internet companies are not something they’re used to lending to,” said Alibaba Group CFO Joseph Tsai.

It was also in February, when the terms of the Yahoo loan were still in flux, that the company came forward with plans to privatise

The company offered shareholders HK$13.50 a share, matching the IPO price to the cent. The Hang Seng was down 27% since the dot-com went public, and shareholders were being offered a 55.3% premium to the 10-day average.

“We provide our shareholders a chance to realise their investment now at an attractive cash premium rather than waiting indefinitely during this period of transition,” Ma said in the take-private announcement.

It was another instance where flexibility was paramount: the loan’s proceeds, which had already been downsized, were now earmarked for the privatisation, as well as the Yahoo buyback.

The mandated lead arrangers signed the loan on February 21 for the world’s biggest internet sector privatisation. It comprised a US$2bn 12-month bridge loan that, with step-ups, paid a blended margin of 450bp–480bp over Libor. The US$1bn three-year term loan had a 450bp over Libor margin.

Richly priced

If there had been any criticism it was that the deal’s terms were too rich; that the borrower could have pushed a little harder. In March, after signing with the MLAs, it sought to widen the syndicate and sent out invitations to about 10 lenders with tempting all-in pricing north of 600bp over Libor.

“We aren’t interested in squeezing the last cent out of the terms, we have a business to run,” said Tsai. “Some companies can get bogged down by nickeling and diming their leads.”

Pricing aside, for many the loan’s most attractive characteristic was its structure. While not the first of its kind, it has become a model for China-centred conglomerates that want to raise bank debt offshore.

The group recorded 2011 revenue of just under US$3bn and net profit of about US$500m. Most of the turnover came from dividend payments it received from revenues that China operating subsidiaries and generated.

With few tangible assets to offer as security, the borrower, Alibaba Group Holdings, had to assure lenders that they would have access to those flows. PRC regulations allow once-a-year dividends of as much as 85%–90% of net income.

The loan documentation’s covenants and specifications did the trick: lenders became comfortable that the operating subsidiaries would repatriate 100% of the distributable profits for debt service.

“This is new technology for China lending,” said Michael Yao, head of Alibaba’s corporate finance team. Yao joined the company in November from Rothschild, where, as co-head of global financial advisory, Hong Kong, he was instrumental in structuring the financing package.

Not done yet

The deal was wrapping up well oversubscribed when, on May 20, the company reached an agreement with Yahoo for a share repurchase. Alibaba had to go back to lenders with a big ask: would they allow an additional US$1bn in borrowing if necessary?

The plan was that most of the loan would fund the US$2.5bn privatisation and the remaining US$500m, plus a US$1bn increase, would, in part, finance the Yahoo buyback.

This was new territory for banks. They were concerned that money earmarked to repay the bridge loan would be diverted to the Yahoo purchase instead.

Some lenders balked, naturally. Alibaba executives, however, did not fret. As the amendment was being negotiated, they were in discussions with business partner China Development Bank (CDB).

Ultimately, lenders agreed to the amendment and CDB later signed on for two US$1bn term loans with three- and four-year tenors, taking out the US$2bn bridge facility. Then, in July, Alibaba got a US$1bn four-year loan to help fund the Yahoo deal, bringing the total to US$4bn.

In addition to the loans, the company paid for the deal with a US$3.9bn convertible preference and ordinary share issue and cash on hand.

In the end, Alibaba Group has remade itself in more ways than one: “Having done these deals, we aren’t averse to debt, whereas before we were,” Tsai said.

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Issuer of the year 2012