Part e
Figure xxx (Source: Bloomberg Terminal) shows the details of Alibaba Bond issued in year 2014 and 2017. Both have issued 10-year and 20-year bond. The 2014 issued 10-year bond has an issue price of 99.817 with coupon 3.125 per year, come with issue spread 128 basis points and 3.62% yield to maturity. Compare to same maturity length bond in 2017, it has slightly low issuing price ($99.396) with lower coupon 3.4 per year. Issue spread is 108 and yield to maturity is 3.47%, both figures has been decreased compare to 2014. We have observed the issue price has been decreased from $99.817 (2014) to $99.863 (2017), the difference is reasonable as we also observed slightly decrease from coupon payment and YTM. Moreover, the issue spread has also been decreased from 128 to 108. both micro and macro factor which may influence spread will be discussed in later section. As for the 20-year bond, there is a great difference in coupon payment and 20 years can be considered as long maturity length. the longer the maturity, the coupon reinvestment is becoming more important. Hence, the long term and distinct coupon payments make the 20-year bond non-comparable.
Issue Date Maturity Issue Price Cpn Issue Spread (Bp) YTM S&P500 term (Years) Benchmark mid yield
11/28/2014 11/28/2019 99.618 2.5 95 2.58% A+ 5
11/28/2014 11/28/2021 99.558 3.125 115 3.20% A+ 7
11/28/2014 11/28/2024 99.817 3.6 128 3.62% A+ 10 3.65%
11/28/2014 11/28/2034 99.439 4.5 148 4.54% A+ 20 4.40%
12/06/2017 06/06/2023 99.853 2.8 73 2.83% A+ 5.5
12/06/2017 12/06/2027 99.396 3.4 108 3.47% A+ 10 3.42%
12/06/2017 12/06/2037 99.863 4 118 4.01% A+ 20 3.82%
12/06/2017 12/06/2047 99.831 4.2 138 4.21% A+ 30
12/06/2017 12/06/2057 99.813 4.4 158 4.41% A+ 40
Nakashima and Saito in 2007 indicate that both economy wide factor and firm level factor are determinates of credit spread of corporate bond. In our case, overall economy, inflation and industry develop stage are considered as macro factor to determine credit spread. Firstly, figure xxGDP figure indicates both China and U.S are experiencing economic growth, come with the decreasing level of interest on corporate bond and increasing level of treasury yield leads Alibaba bond became less risky, which results to a tightened credit spread. Moreover, annual inflation rate in both countries is under a downward trend. see inflation figurexxx. Kang and Pflueger (2012) suggested credit spread can be changed by two ways, volatilisable inflation increase the chance of corporate to default due to their real high value liability. In addition, real cash flow can be matched with inflation closely, hence when inflation happen, its likely to hit company to suffer decrease level of real cash flow and increase level of real liability, which then potentially leads to the default and vice versa. Ali bond has been better off with decreasing inflation in both nations, their real cash flow has been increased to match the decreased real debt, hence might to result in a lower credit spread. Thirdly, the e-commerce industry was in the developing stage in 2014 and entered in mature stage in 2017 as we have observed the decreasing growth rate shown in figurexxxx. Therefore, the company has been beneficial from the developing stage transformed to the stable environment since majority investor believe in investment made in successful industry could lead them the constant gain. As the growth, Ali is more likely to pay their debt as promised hence the spread would shrink.
As for the micro factor, investors recognition and the companies competitive advantage consider in determine the credit spread. Firstly, in 2014, Ali has reached
$25 billion from IPO and $8 billion from debt market. Investor became more interested in the company. After 3 years, the new issued $7 billion have over 6 times subscription ratio from investors due to their enthusiasm. In the meantime, technology industry has few bond supplies, which is quite far below the demand from investors. As a technology giant, Alibaba has beneficial from this ‘rare’ technology bond issuance. The company’s’ value has increased and reflect on their stock price, which has been doubled since 2014. It is also reflecting the investors fanaticism. As company growing its reputation, position in the industry, the credit spread hence can be reduced. Secondly, Alibaba has comparative advantage among its competitors, it has treble times market capitalization than JD, which the major competitor of Alibaba in Chinese market. Moreover, it had a favourable debt structure, which enabled it to settle debts and remain active. D/E ratio was 28.3 in 2017 and for JD is 49.15. all those positive developing perspectives potentially induce the credit spread.
Part g:
With macro level consideration, there is a predicted economy and inflation growth in both nations in year 2018. (source: Trading economics). The total e-commerce will still increase the revenue in a decreasing growth speed to fully enter to the mature stage until year 2021. For sure Ali can be profits from economic growth and placement in a mature industry, the spread tends to decrease affected by those two factors. However, we could not measure the impact on the spread widening result by the predicted increase in inflation.
From firm level consideration, as the industry has entered to a slowing down mature stage, Alibaba has experienced pressure from its competitors, instead of strengthening its major e-commerce business, the core business has put more weights in cloud computing and entertainment, which has boosted their revenue in a fast pace. In the meantime, Alibaba has made a series aggressive acquisitions (Hema store, and intention to merge Ele.me) to keep expanding its business. As the business grows, the cost of borrowing tends to decrease.
We should also consider the industry competitors as a reference to price a spread for Alibaba Debt. Tencent, another Chinese internet giant, has issued $5 billion debt in USD after a month since $7 billion issued by Alibaba in 2017. The 5-year and 10-year spread is 65 and 105bp respectively. The 10-year spread is slightly lower than Ali’s 10-year bond potentially due to Tencent has a lower net cash position and slightly higher leverage. The two giants are comparable as they both have major target market in china and large amount debt issued in U.S currency, both have hefty subscription ratio which reflects investors recognition. Although the business areas of Tencent and Alibaba are slightly different, the value of the securities of the two companies are similar from investors point of view. Both show China's different strengths in turning to a technology-driven economy. However, Alibaba bond has a better balance sheet and credit rating than Tencent as showed in figurexxx, while in the meantime, investors may have a lower confidence due to the uncertainness of Alibaba’s market behaviour, especially we are considering Alibaba is going to issue large, short term debts in 2018, which could potentially lead a higher spread. Hence, we may consider employing Tencent spread as the lower boundary if Alibaba is going to issue the new 3-year bond.
Alibaba Tencent
Total Debt/T12M EBITDA 1.19 1.38
Total Debt/EBIT 1.43 1.78
Long -Term Debt/Equity 20.48 45.41
Moody's Rating A1 A2
Source: Bloomberg
Note: Balance sheet data as of Sept. 30, 2017, the last reported financials and prior to both debt issuances.