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Alibabas Bonds Dilemma Location Timing and Pricing

Solution Id Length Case Author Case Publisher
2774 1739 Words (7 Pages) Emir Hrnjic Ivey Publishing : W17088
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Alibaba, an e-commerce platform, is the undisputed leader in China. Through the various channels it has set up, it can operate in a wide range of markets. Taobao.com, their end-user e-commerce platform, is huge in China, whereas Tmall.com, their B2C e-commerce platform, has a sizable portion of the industry. There are hundreds of billions of people using these services, and they house millions of retailers and enterprises. The company aimed to expand, so it began exploring various financing options. Three times in 2012 and 2013, Alibaba utilized $12 billion in financings from a wide variety of lenders. Alibaba went public on the Stock Exchange of New York in early September 2014, even though the overwhelming majority of its income came from China. Upon its first public offering (IPO), the company's stock price increased by 38 percent, and its market valuation increased to $231 billion, making it the biggest IPO on NYSE record. U.S. investors saw potential despite their lack of familiarity with Alibaba.

Following questions are answered in this case study solution:

  1. Should Alibaba issue the bonds in the United States or China?

  2. How does financing with bonds differ from Alibaba’s previous form of debt financing with syndicated loans?

  3. Discuss the different risks Alibaba is facing.

  4. Is this a good time for a company to issue bonds?

  5. How would you price Alibaba’s bonds?

Case Study Questions Answers

1. Should Alibaba issue the bonds in the United States or China?

There are several considerations for determining the best location for bond issuance by Alibaba based on the available data. For starters, they have established headquarters in China, where they have both established a strong market presence and seen rapid growth in sales. Second, the firm's debut on the New York Stock Exchange (NYSE) was a huge success, resulting in increased brand awareness and proof that it can compete successfully in the American financial sector. Third, Alibaba is a Variable Interests Entity, which is risky because the Chinese government is currently assessing the economic viability of this legislative framework. Any foreign ownership might be hampered if Chinese law ignored this framework. From a global perspective, the U.S. market is unparalleled in size, vitality, and depth.

It's a haven for businesses to issue bonds, giving Alibaba its best shot at raising money. There is far less instability in the money system because so many of them are reliant on the U.S. markets' stability. As compared towards the Chinese market, there are comparatively few constraints within its structure. As a result, Alibaba will be able to issue securities at perhaps more favourable rates, reducing its exposure to tariff and foreign exchange risk. Finally, there is the potential for benefitting from fluctuations in the value of foreign currencies on the U.S. market. This might be very advantageous to Alibaba because of the widespread belief that the Yuan will rise in value as a result of its current undervaluation. Given that interest and principal on U.S.-traded bonds are both payable in U.S. dollars, the possibility of arbitrage gains when converting dollars back into the company's domestic currency, the Chinese yuan, exists.

The decision to issue in the U.S. market appears to be the most advantageous option after considering all of the relevant criteria. This industry's reliability and promise, combined with the company's success in recent years on the NYSE, should make issuing bonds here a reduced, elevated endeavour. Because of the uncertainty surrounding the outcome of the Variable Interest Rates inquiry, the business may well be tempted to issue in China. This would be a poor strategic move.

2. How does financing with bonds differ from Alibaba’s previous form of debt financing with syndicated loans?

In light of the company's existing situation, issuing bonds is preferable to taking out loans. Alibaba may finance their debts and business for far less money because of the reduced rates, the most immediately noticeable gain. Alibaba can take advantage of the open industry's low-interest rates without having to put up collateral, as would be required with a syndicated loan.

They will not only never need to worry about providing collateral for their bank loans, but they will also no anymore be bound by the specifics of these loans. Till the payment is completed, many banks may limit the borrower's ability to pursue additional investment or financing for the business. Last but not least, unlike the bond market, banking loans are offered as a temporary source of financing. 

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