It is not easy at the best of times for an asset-light, privately owned Chinese company to make a debut in the capital markets. For the blowout response to a complex financing with multiple moving parts, Alibaba Group’s US$3bn dual-tranche financing is IFR’s Asia Pacific Loan of the Year.
When Alibaba Group first started talking to lenders about a potential loan in late November 2011, it might not have expected the journey it would endure. With the eurozone crisis in full flow and the Asian loan market reeling from the retreat of European lenders, targeting a US$4bn term loan was fraught with market and execution risks.
Furthermore, any misstep could have jeopardised the M&A deals the issuer was pursuing – a privatisation of its Hong Kong-listed unit, Alibaba.com, and a buyback of part of the 40% stake Yahoo held in the Chinese e-commerce giant.
The loan not only navigated tough markets, it also had to manage uncertainty around the privatisation, since the company needed certain funding, but could not be sure that shareholders would vote in favour of the delisting. Alibaba was also in negotiations with Yahoo, and struck a deal to buy back half of the latter’s 40% stake for US$7.1bn in early May, adding a further twist to its financing needs.
Although Alibaba is China’s largest ecommerce company, the operation’s asset-light nature posed a challenge to lenders in Asia, who, typically, prefer to lend against hard assets. Moreover, there were of precedents in Asia for loans to internet companies.
The biggest hurdle, however, lay in the fact that Alibaba was a privately owned company with its operations and revenues primarily derived in China. The loan, borrowed via an offshore entity, could only be serviced with the dividends the onshore operating companies paid out annually.
While there was a precedent for the so-called offshore-China structure – Chinese budget hotelier Home Inns & Hotels Management’s US$240m four-year acquisition financing that closed in late February – that deal was significantly smaller than Alibaba’s.
Initially, lenders resisted in early December, when Alibaba debt adviser Rothschild asked lenders to revert by the third week of January with US$1bn underwriting commitments and targeted final holds of US$400m. By mid-January, Alibaba cut the deal to US$3bn.
Meanwhile, in late December, the company hired a Washington lobbyist to address any US political opposition to the deal, amid speculation that Alibaba and other investors planned to take over Yahoo completely.
In early February, six banks were close to forming the arranger group for a US$3bn dual-tranche loan, split into a US$1bn three-year term facility and a US$2bn 12-month bridge. However, the financing’s purpose changed. Roughly US$2.5bn of the loan would go towards privatising Alibaba.com.
A couple of weeks after the privatisation was announced, Credit Suisse, Deutsche Bank, ANZ, DBS Bank, HSBC and Mizuho Corporate Bank formed the arranger group and provided underwritten commitments of US$500m each – impressive because market conditions were far from conducive for taking on underwriting risk.
Success was not guaranteed as there had been few big-ticket M&A financings from Asia in 2012. Yet, senior syndication closed in mid-June to a blowout response from 13 other lenders committing a combined US$2.5bn, making general syndication unnecessary.
The factors contributing to the strong response were a watertight structure (dividend maximisation, low gearing, bridge-cum-term loan split), the short tenor (blended average life of 1.5 years) and the rich pricing (blended top-level all-in of 604.67bp).
Moreover, with China Development Bank also stepping up as an equal lender on a bilateral basis, the US$2bn 12-month bridge facility had a certainty of takeout, allowing foreign lenders to commit on a separate US$1bn four-year term loan soon after.
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