Alibaba wows market with $8B debut dollar bond

Alibaba IPO
Adam Jeffery | CNBC

Alibaba wowed the markets Thursday with its ground-breaking US$8 billion debut dollar bond, pricing it at levels in line with and even tighter than some of the world's best-known companies.

The Chinese e-commerce giant amassed more than US$55 billion of orders for the highly anticipated six-tranche deal, one of the largest investment-grade bonds of the year.

The narrow pricing marked a milestone for a Chinese company, as accounting standards in China have a bad reputation in the markets.

"This is a new name highly exposed to the emerging Chinese retail market," said Matthew Duch, senior portfolio manager at Calvert Investments.

"By most comparisons the pricing is fair. But being its premiere debt deal, there's additional interest."

Alibaba priced US$1 billion 1.625% three-year fixed-rate notes at T+70bp; a US$300 million three-year floater at 3mL+52bp; US$2.25 billion of 2.5% fives at T+95bp; US$1.5 billion of 3.125% sevens at T+115bp; US$2.25 billion 3.6% 10s at T+128bp; and US$700 million of 4.5% 20s at T+148bp.

With its high A1/A+/A+ rating, and using the enormous hype around its record-breaking equity IPO two months ago, Alibaba was able to break the mold and have global investors price its deal against blue-chip names like Amazon (Baa1/AA-), Cisco (A1/AA-)and Oracle (A1/A+), rather than much wider trading Chinese tech companies like Tencent (A3/A-) and Baidu (A3/A).

At 128bp on the 10-year, for example, Alibaba priced inside where Amazon would bring a new 10-year, according to some market participants, and not much more than about 10bp to where some investors would buy a 10-year from Oracle if it was part of a similarly-sized transaction.

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"They clearly wanted to be priced in the context of their global peers and wanted to be viewed as a global tech or retail company, rather than one that should be compared with other Chinese corporations," said one syndicate head who followed the deal.

"They've priced significantly through where any other Chinese corporation would come to market."

Active book-runners Morgan Stanley, Citigroup, Deutsche Bank and JP Morgan announced the trade in New York on Wednesday afternoon.

Book-runners closed the book mid-morning the following day with over US$55 billion of demand spread across more than 2,700 line items from something like a thousand different investors.

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That enabled Alibaba to pull in guidance by 10-25bp across six tranches from initial price thoughts, having dropped an initially proposed five-year floating rate note.

But the dramatic tightening was enough to drive some would-be investors away.

"Initially they (spread levels) looked decent enough, but they ended up tightening beyond what our analysis warranted," said Frank Reda, senior trader at fund management firm Taplin, Canida and Habacht.

"You need to have some sort of China compensation in my opinion." Comparables included Cisco 2.125% March 2019s at G+62bp; Cisco 3.625% March 2024s at G+105bp, Oracle 2.25% October 2019s at G+64bp and Oracle July 2024s at G+107bp.

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