[NEW YORK] Alibaba Group wowed the markets on Thursday with the largest US dollar bond sale on record from an Asian company, pricing its US$8bn debut at levels even tighter than some of the world's best-known issuers.
The Chinese e-commerce giant, which listed in New York in September through a US$25bn IPO, amassed more than US$55bn of orders for the long-awaited six-tranche deal, one of the world's largest investment-grade bonds of the year.
The narrow pricing marked a milestone for a Chinese company, comfortably beating higher-rated state-owned issuers and offering investors no compensation for the perceived risks associated with Chinese investments. "The pricing on Alibaba's bonds did not reflect a China risk premium in our view, and was priced more like a US credit, given the solid demand from the US investor base and hype around the IPO," said Raymond Lee, a Sydney-based portfolio manager at Kapstream Capital, one of Australia's largest fixed-income funds.
Alibaba, rated A1/A+/A+, priced US$1bn of 1.625 per cent three-year fixed-rate notes at 70bp over Treasuries, almost 40bp inside where state-owned China National Petroleum Corp (Aa3/AA-/A+) had sold three-year bonds just two days earlier.
Alibaba also sold a US$300m three-year floater at 52bp over three-month Libor, as well as US$2.25bn of 2.5 per cent five-year bonds at 95bp over Treasuries, US$1.5bn of 3.125 per cent sevens at 115bp over, US$2.25bn of 3.6 per cent 10s at 128bp over and US$700m of 4.5 per cent 20-year notes at a spread of 148bp.
At those spreads, Alibaba came 35bp-50bp inside China tech names Baidu and Tencent, and even priced through some US blue-chip tech giants. The seven-year tranche came inside Amazon's 2022s, quoted at a G-spread of 116bp, and the 10-year also easily pierced eBay's interpolated curve. "They clearly wanted to be priced in the context of their global peers and wanted to be viewed as a global tech or retail company, rather than one that should be compared with other Chinese corporations," said one syndicate head who followed the deal. "They've priced significantly through where any other Chinese corporation would come to market." The aggressive pricing, however, drove some would-be investors away, and the initial 5bp-10bp tightening of tranches in the grey market was quickly reversed when the deal was free to trade. By Friday morning in New York, the five, seven and 10-year tranches were bid 2bp-4bp wider than new issue levels.
One portfolio manager felt that eventually the deal would trade well, but would probably remain slightly wide of new issue levels for a while, until more investors dug into Alibaba's accounts and understood the strength of its credit metrics.
US investors anchored the trade by taking about three-quarters of the notes, two sources familiar with the transaction said. The company and its bankers had not disclosed distribution statistics at the time of writing. "This is a new name highly exposed to the emerging Chinese retail market," said Matthew Duch, senior portfolio manager at Calvert Investments. "By most comparisons the pricing is fair. But being its premiere debt deal, there's additional interest." Asian interest Asian investors, whose orders exceeded US$11bn across the tranches, were allocated a mere 15-20 per cent of the notes, the two sources said.
Asian investors generally found Alibaba's bonds expensive as they are accustomed to higher risk-adjusted premiums from Chinese issuers. According to a research note from Nomura, Chinese credits typically pay a 20bp-50bp premium to their US peers. "They've priced significantly through where any other Chinese corporation would come to market" For Chinese tech issuers, the premium comes from geographic concentration and regulatory risks. "In general, Chinese IT companies are asset-lite and their business risks are focused on one geography that is China," said Arthur Lau, Hong Kong-based head of Asia fixed income at PineBridge Investments. "Compared with a more mature market like the US, Chinese tech companies operate in an environment where policies and regulations are more uncertain." Despite those concerns, Alibaba managed to convince US investors to look to blue-chip names such as Amazon (Baa1/AA-), Cisco (A1/AA-) and Oracle (A1/A+) rather than Tencent (A3/A-) and Baidu (A3/A).
Market participants, however, played down suggestions that the trade would have an impact on the wider Asian bond market, noting that Alibaba was a unique case. "For the Asian credit market, the Alibaba bonds are rich, although they were priced fair for the US," said Owen Gallimore, Singapore-based head of credit strategy, Asia, for ANZ. "Alibaba is a US credit - as it's listed in the US and trades on US technicals - and unfortunately it will not provide the Asian market with a free-ride premium." Active bookrunners Morgan Stanley, Citigroup, Deutsche Bank and JP Morgan announced the trade in New York on Wednesday afternoon, and closed the book mid-morning the following day with more than US$55bn of demand spread across more than 2,700 lines from around a thousand different investors.
That enabled Alibaba to pull in guidance by 10bp-25bp across six tranches from initial price thoughts, having dropped an initially proposed five-year floating-rate note offering.
Credit Suisse and Goldman Sachs were passive bookrunners. BNP Paribas, DBS, HSBC, ING, Mizuho Securities were co-managers.