Alibaba set to test the China premium

Mon Nov 5, 2012 3:43am EST

* Retailer eyes dollar bonds

* Banks suggest pricing can be near eBay's

* Tight deal would bring market full circle

By Christopher Langner

Nov 5 (IFR) - Fresh from buying back a stake from Yahoo!, Chinese e-commerce group Alibaba is in discussions with banks ahead of a potential debut US-dollar bond.

The deal is yet to be mandated and Alibaba still has a few hoops to jump through before it can issue what is expected to be a SEC-registered bond of at least US$1bn. If bankers have it their way, however, the deal may emerge before the end of November.

Alibaba privatised its Hong Kong-listed wholesale arm, Alibaba.com, and bought back a 20% stake Yahoo! owned earlier this year in a multi-faceted restructuring that will pave the way for the eventual listing of the parent company.

While much of the excitement around the group has focused on the possibility of a record-breaking IPO from Asia's technology sector, a benchmark bond from China's biggest e-commerce platform also has the potential to reshape the landscape for Asian credit.

Bankers pitching for the mandate are telling Alibaba it may be able to price bonds at only a small premium over similar companies in the US.

If banks on the deal succeed, it would be a watershed moment for Asia's debt capital markets.

"This would bring the market full circle and more," said a credit analyst. "At this exact time last year, Chinese bonds were selling off 20 points. So, if Alibaba manages to eliminate the China premium, it would be a very interesting turnaround."

Global investors have traditionally demanded big premiums over US credits to compensate for the lower liquidity on Asian bonds, but the surging interest in Asian credit markets this year has allowed a select group of issuers to narrow that gap.

South Korea's Samsung Electronics, for instance, launched a five-year bond in April at 80bp over US Treasuries. At the time, the likes of Oracle, Dell and Cisco were trading at spreads ranging from 35bp to 70bp over, while the Korean agencies were at spreads closer to 200bp. In pricing almost in line with its Western peers, Samsung has offered a hint of what may be possible for Alibaba.

Bankers remained tight-lipped last week about their discussions with the Chinese group, which generated 2011 Ebitda of US$965m and was valued at around US$35bn, based on the terms of the Yahoo buyback. However, one origination banker admitted: "Everybody is pretty much pitching the same idea [that they can price without much China premium]."

EYES ON EBAY

To meet that objective, Alibaba would have to print closer to eBay, the US online marketplace with a similar size and economics, than to Tencent, so far the only Chinese internet company to have sold US dollar bonds.

Tencent, rated Baa1/BBB+, has a 3.375% bond due March 2018 trading at around 225bp over US Treasuries, according to Thomson Reuters pricing. Meanwhile, eBay has bonds due 2022 that were trading last week at around 70bp over. eBay is rated two notches higher at A2/A/A.

Pricing a bond inside 100bp over US Treasuries, however, will be no small task when China's top state-owned enterprises are well wide of that mark.

Chinese oil major CNOOC, rated higher than eBay at Aa3/AA-, has 2022 bonds that trade at a spread of 125bp over, illustrating the premium on Chinese credit. At the same time, Mexican counterpart Pemex, rated five notches below CNOOC at Baa1/BBB/BBB, trades at 140bp, a much smaller pick-up than such a large discrepancy in ratings warrants.

Nonetheless, Samsung's experience suggests that may be possible.

"Instead of taking the deal to the EM portfolio managers in the largest asset managers, we took that transaction to the investment-grade guys," said one of the leads on the deal.

The top contenders for the mandate are the eight banks that signed up to Alibaba's most recent loan, a US$1bn four-year facility. The eight are ANZ, Barclays, Citigroup, Credit Suisse, DBS Bank, Deutsche Bank, Mizuho Corporate Bank and Morgan Stanley. However, only a couple of banks are expected to act as global co-ordinators.

While a deal size of at least US$1bn is expected, Alibaba's debut could be much larger if the issuer opts for multiple tranches to create a full-fledged yield curve in one go.

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