If Alibaba is not short of money, why does it still issue bonds?

After raising $25 billion in IPO financing, Alibaba is preparing to issue corporate bonds totaling $8 billion. The world's largest e-commerce company is preparing to sell senior unsecured bonds to US investors. The $8 billion corporate bond is already among the top five US dollar corporate bonds this year and is also the largest corporate bond in Asia's history.

Rating not low

For this bond issuance, the three major international rating agencies all gave Alibaba a rating equivalent to A+ (Standard & Poor's and Fitch gave A+, Moody's gave A1, different standards but similar).

What is the concept of this?

Apple 's corporate bonds are rated AA+, and some countries with strong backgrounds, reputations and financial resources are rated AAA, such as the United States (downgraded to AA+ by Standard & Poor's after 2011). Before 2011, China's sovereign credit rating was A+, which is currently the same as Alibaba's bond rating (China's sovereign credit rating was upgraded to AA- after 2011, and Alibaba's bonds are one level lower than China's sovereign credit); South Korea and Israel's national bonds are rated A1 by Moody's, which is similar to Alibaba's bond rating in terms of credit.

Among the BAT Big Three, only Alibaba meets this standard.

Advantages and risks from the analyst's perspective

Standard & Poor's analyst Tony Tang believes that Alibaba has 80% of the Chinese market share, higher profit margins and lower costs than its competitors, and will maintain a net cash position despite the possibility of large-scale acquisitions and capital expenditures.

His concern about Alibaba is that control is too concentrated. Chairman Jack Ma and 27 "partners" may influence the composition and strategy of the company's board of directors. Fortunately, major shareholders such as SoftBank and Yahoo can balance Alibaba's partnership structure. Masayoshi Son and Mayer are not just there to do the work.

Moody's analyst Cai Hui said that Alibaba has a high profile and is a dominant player in China's rapidly growing e-commerce market. Alibaba's market and traffic costs are very low, so its profits are very high. Compared with the growth rate of 55% to 60% two years ago, Moody's rating believes that even Alibaba's growth rate of around 45% is normal.

In addition to Alibaba's large-scale acquisitions, Moody's is concerned about two other points: Alibaba is extremely dependent on the Chinese market, with 90% of its current revenue coming from China; in addition, its affiliated company Ant Financial needs additional funds to offset non-performing loans, because Ant Financial lends money to Alibaba's merchants and sells funds, etc., which involves certain risks.

If you are not short of money, why issue bonds?

Issuing bonds does not mean that Alibaba is short of money. In fact, Alibaba has a lot of money in its bank account. As of the end of the third quarter of 2014, Alibaba had cash and equivalents of RMB 109.911 billion, making it one of the Chinese Internet companies with the most liquidity.

Using the group's cash is not the lowest cost method. For example, Apple, which has $159 billion in cash, is rich enough to rival a country, surpassing the United Kingdom, the United States, Canada, Germany, Italy, France and other countries, but it issued $17 billion and $12 billion in corporate bonds in 2013 and 2014 respectively. This is because most of Apple's cash or equivalent securities are kept overseas, and Apple is actually unable to use this part of the funds effectively, because if this part of the cash is transferred back to China for shareholder returns, it will be subject to heavy taxes.

Similarly, as a company listed in the United States and with major shareholders such as SoftBank and Yahoo, Alibaba finds it difficult and inexpensive to use cash, so issuing bonds is actually a better way.

Alibaba chose to issue bonds at this time because the current cost of using funds is too low!

Before going public, Alibaba raised $8 billion from a bank consortium in 2013, mainly for acquisitions, including UC and AutoNavi . The financing was divided into three batches: a three-year loan of $2.5 billion, a five-year loan of $4 billion, and a three-year revolving credit arrangement of $1.5 billion. Although Alibaba is the world's largest e-commerce group, its bargaining power in bank loans is still very limited, not to mention that it is facing a bank consortium composed of 23 major domestic and international banks, so the cost of this financing should not be low.

Alibaba's star effect brought by the global capital's pursuit when it went public, as well as the outstanding performance of 57.1 billion yuan on Singles' Day, have made Alibaba's credit incomparable with that before it went public. Bonds are the pricing of risks, and credit itself is wealth. The growth of Alibaba's credit means reduced risks and lower financing costs.

Taking advantage of the current rating that is comparable to sovereign credit and using low-cost financing, whether it is to resist future risks or for corporate development, it is cost-effective. Only when you have food in your hands can you be at ease. It is said that part of the bond financing this time will be used to repay the syndicated loan in 2013 in advance. This is indeed a good arrangement: it further reduces the financing cost for acquisitions and listings last year, and the cost of bonds is much lower than that of loans.

What is the cost of bonds? Currently, the average yield of 10-year AA corporate bonds in the United States is 3.10%, and the average yield of 10-year single A corporate bonds is 3.34%. Currently, the domestic commercial loan of more than five years is 6.55%.

For investors, owning these high-quality corporate bonds is about as risky as cash and U.S. Treasuries, but the returns are much higher than either, as the latter have a yield close to zero. The yield on the 10-year bonds of these new bonds may be about 150 basis points, or 1.5 percentage points, higher than the U.S. Treasuries of the same maturity. The yield on the 7-year bonds may be 135 basis points higher than the benchmark.

With such a good credit rating, and such cheap long-term funds, the less you use it, the more you lose, because in the long run, the United States has entered a period of interest rate hikes, and the Federal Reserve is about to raise interest rates, and the cost of US dollar funds will become more and more expensive.

How will the money be used?

In addition to replacing the syndicated loan, Jack Ma said at the time of the IPO that he would make more investments in the United States; through AliExpress and Taobao Overseas, Alibaba is strengthening its international layout. This year's Double Eleven was a small test, and the results of Alibaba's internationalization will be more obvious next year and the year after. Part of this bond financing in US dollars will also be used for internationalization in the future.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.