Alibaba Group Holding Ltd (BABA), the same Chinese e-commerce giant that raised $25 billion in its record-setting September IPO, has taken to the debt markets to raise even more cash.
Alibaba has sold $8 billion in bonds, according to a Bloomberg report — because sometimes a $25 billion cash infusion just doesn’t cut it.
Jokes aside, anyone who owns BABA stock should be thrilled by the announcement.
A Savvy Move for BABA by Jack Ma
The corporate bond markets can strike a happy medium between investors looking for low-risk, low-return investments like Treasuries and blue-chip stocks paying a dividend. With a higher risk and return than U.S. T-Bills, but ideally less fluctuation than stocks, corporate bond sales tend to attract a certain type of conservative investor.
That said, all corporate bonds aren’t created equal. Twitter Inc (TWTR) bonds, for instance, were downgraded by Standard & Poor’s to “junk” status last week. But Alibaba’s $8 billion bond offering offers far lower risk than Twitter’s debt.
Moreover, for several reasons, the bond sale should do wonders for BABA stock for several reasons:
- It shows the market’s confidence in the company: Alibaba raised $8 billion in the offering. Consider that the so-called “supply” of debt available to investors. The demand? $57 billion. Fixed income investors were frothing at the mouth for Alibaba’s notes, which Standard & Poor’s gave an A+, its fifth-highest rating. The outsized demand allowed BABA to borrow money at dirt-cheap rates, with five-year notes yielding 2.5% and 10-year notes going for 3.6%. Even though the $8 billion bond sale was a fraction of what Alibaba could’ve raised, it was the largest dollar-denominated debt offering by an Asian company ever.
- It will help Alibaba’s bottom line by lowering its cost of capital: Why could Alibaba possibly need more money? It will use the funds to refinance existing credit agreements, lowering BABA’s cost of capital and effectively reducing its interest payments, just like a homeowner might do with his or her mortgage when interest rates drop. This should juice Alibaba’s earnings and bode well for BABA stock and its shareholders.
- It doesn’t dilute BABA stock holders: Unlike a secondary stock offering, which can raise more capital but dilute existing shareholders, the $8 billion Alibaba just raised won’t do a thing to Alibaba’s share count. Compare this to the recent decision by GoPro Inc (GPRO) to raise more capital through a secondary offering of GPRO stock at depressed prices, and you can see why Alibaba’s method would be preferred by equity holders.
In early trading today, Wall Street appears to see many of the same bullish indicators for BABA stock that I list above. Shares are trading more than 1% higher, and have now advanced more than 60% from their $68 per share IPO price.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid.
