Jack Ma Challenges China Stigma With Alibaba Bond: China CreditChristopher Langner
Jack Ma had to play down Alibaba Group Holding Ltd.’s China roots during a world-record initial public offering. Now he’s due to test confidence in the state-dominated economy with Asia’s biggest dollar bond sale.
The internet giant, which Ma said in September just “happens to be in China,” may pay a yield-premium on the planned $8 billion issue that is higher than developed-market peers, according to Bank of New York Mellon Corp. Concerns corporate governance and disclosure in the nation are lagging have forced investment-grade Chinese issuers to pay 15 basis points more on average than their Asian peers this year to sell notes, Bank of America Merrill Lynch indexes show.
China’s richest man has tried to overcome criticism of Alibaba’s corporate governance structure, which gives 30 individuals the ability to nominate a majority of the board, and sought to burnish its image in meetings with U.S. chief executives as well as with former President Bill Clinton. Shares sold in the $25 billion IPO on Sept. 18 have jumped 63 percent and attracted investors including Soros Fund Management LLC, Fidelity Investments and Third Point LLC.
“Alibaba is a unique case as it has a U.S. listing and it has enormous market visibility after the IPO,” said Jon Pratt, managing director, head of Asia-Pacific debt capital markets at Barclays Plc, the fourth-biggest arranger of bonds in the U.S. “They should be able to attract many first time investors into China credit from U.S. high-grade buyers and they have the ability to re-price the Chinese credit curve.”
Alibaba’s bond sale may help lower yield premiums for other Chinese issuers by helping familiarize international investors with their offerings, according to Pratt.
The company is planning the note to refinance existing debt, a company spokesperson said yesterday, declining to comment further.
The operator of websites including Taobao Marketplace, which links individual buyers and sellers, has an A+ rating from Standard & Poor’s, its fifth-highest investment score. That places it one notch below the AA- score on Amazon.com Inc. and one above the A ranking on EBay Inc.
The planned issuance from Alibaba, based in the eastern city of Hangzhou, is attracting attention as international investors buy unprecedented amounts of debt from the world’s second-largest economy. Chinese borrowers have sold a record $179 billion of dollar-denominated notes this year, up 61 percent from all of 2013, Bloomberg-compiled data show. The fundraising from Alibaba also underscores Premier Li Keqiang’s attempt to switch the economy’s focus toward services from smokestack industries.
“There are many corporates issuing and China’s weight in global indices has grown and will continue to grow,” said Prakash Gopalakrishnan, emerging markets corporate debt analyst at BNY Mellon in Singapore. “We think, over time, markets will gain comfort and the China premium will be reduced for names and sectors that will fare well under China’s revised economic model.”
Some 86 percent of the bonds from Chinese borrowers this year were in a Regulation S only format, which U.S.-based investors aren’t allowed to buy. Alibaba’s transaction will be under rule 144A, allowing institutional investors from the country to purchase them, people with knowledge of the matter said last week, asking not to be identified because the details are private.
“U.S. investors are still relatively under-invested in China relative to the size of the economy,” Barclays’ Pratt said. “That will start changing as there is more bond supply.”
Alibaba, which also operates Tmall.com that connects retailers and consumers, provides a venue for the sale of everything from Alaska salmon to Boeing 747s. It has been a bright spot in an economy hampered by a slumping property market and concerns about bad loans that have prompted authorities to take steps to shore up growth. That’s led to a 1.5 percent rally in the yuan against the dollar this half, and pushed the yield on benchmark 10-year government notes down 45 basis points to 3.61 percent.
Chinese issuers have grappled with increasing scrutiny of their finances since Moody’s Investors Service warned of “red flags” on the accounting of 61 companies in 2011. A slump in notes from Agile Property Holdings Ltd. last month after chairman Chen Zhuolin was confined by prosecutors is the latest example of investor risks in the nation.
People have “lingering concerns” about corporate governance and rule of law in China, said Goetz Eggelhoefer, managing partner of Asia discretionary investment at the Rohatyn Group, the New York-based asset manager also known as TRG Management LP that focuses on emerging markets. “There is simply a fear that the lack of transparency equates to an incomplete understanding of the underlying investment.”
Investment-grade bonds denominated in dollars from the country have still returned 8.4 percent this year as investors seek more exposure to Asia’s biggest economy, which economists surveyed by Bloomberg forecast will expand 7.4 percent in 2014. While that would be the slowest growth in more than two decades, it’s still the fastest pace expected from any major economy worldwide, the data show.
“China is such a big economy but the country’s penetration among U.S. bond investors is small considering the importance of the country globally,” Barclays’ Pratt said. “Alibaba’s IPO pushed a lot of equity investors into taking a fresh look at China so it is logical to assume the bond may have the same effect.”