hi there, i wanna know from the attach case what risks does alibaba face and how will this impact a debt issuance? identify changes in alibaba's capital structure in the period prior to and after the listing in NYSE? how dual class share and variable interest entities affect issuance decision? Thanks!

W17088 ALIBABA'S BONDS DILEMMA: LOCATION, TIMING, AND PRICING 1 Emir Hrnji wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2017, Richard Ivey School of Business Foundation Version: 2017-02-21 In November 2014, the chief financial officer (CFO) of Alibaba Group Holding Limited (Alibaba) embarked on a series of meetings with potential investors to gather information about the impending bond issue. Maggie Wu was scheduled to lead Alibaba's team in Hong Kong, Singapore, and London over the course of three days.2 Alibaba was listed on the New York Stock Exchange (NYSE), but an overwhelming majority of its revenues originated in China. Most U.S. investors had not heard of Alibaba until just a few months prior to its initial public offering (IPO) in September 2014. Also, being a high-tech company, Alibaba was subject to the potential for large swings in valuations typical for the industry, making it difficult to price the bond issue. An arduous task for Wu's team lay ahead. Would investors subscribe to the bond issue? What would be the best location for issuing Alibaba's bonds? When should the bonds be issued? And, most importantly, how would the bonds be priced? ALIBABA GROUP After its IPO in September 2014, Alibaba became China's largest e-commerce company.3 Alibaba's online shopping website, Taobao.com, accounted for roughly 90 per cent of China's consumer-to-consumer (C2C) market. Its online retail outlet, Tmall.com, captured more than 50 per cent of the business-to-consumer (B2C) market share in China.4 In global terms, the gross merchandise volume of Alibaba's market places (US$248 billion)5 exceeded that of each of its major competitors.6 (See Exhibits 1 for Alibaba's selected financial results and ratios, Exhibit 2 for Alibaba's income statement, Exhibit 3 for components of Alibaba's revenue, and Exhibit 4 for Alibaba's balance sheet). Alibaba was described as a mixture of \"retailers like Amazon and eBay, financial services like PayPal, and a search engine giant like Google.\"7 As a dominant company in China's e-commerce sector, Alibaba was perfectly positioned to benefit from the rise of China's middle class and its purchasing power. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 2 9B17N001 ALIBABA'S RECENT FUNDRAISING Alibaba had been actively raising funds for growth. While an overwhelming majority of its early stage financing came from private equity investors (which is typical for start-up companies), Alibaba started using different forms of financing between 2012 and 2014. For instance, in 2012, Alibaba raised $3 billion through syndicated loans to take Alibaba.com private, bringing it back within the Alibaba Group. In 2013, the company used proceeds from another syndicated loan to buy back, at a cost of about $7 billion, half of the stake Yahoo! had in Alibaba. Finally, Alibaba went public on the NYSE in September 2014. Each of these financing rounds had different challenges and pricing. Syndicated Loans in 2012 and 2013 8 In March 2012, Alibaba received a $3 billion syndicated loan from five mandated lead arrangers and book runners. This dual-tranche loan consisted of a $1 billion three-year loan (designated as Facility A) at the rate of the London Interbank Offered Rate (LIBOR) plus 450 basis points (bps), and a $2 billion one-year loan (designated as Facility B) at the rate of LIBOR plus 350 bps.9 The Facility B loan had interest rate increases after the sixth and ninth months, translating to a blended margin of 481 bps over LIBOR. Alibaba was not rated at the time of the issuance.10 (See Exhibits 5 and 6 for spreads and fees for this loan). In August 2012, Alibaba signed a new $1 billion four-year loan agreement with eight banks at the rate of LIBOR plus 475 bps.11 Alibaba's $8 billion loan was launched to syndication in May 2013 by nine underwriters. The new loan was priced lower than the $3 billion loan taken out in 2012. The new loan comprised a $1.5 billion, three-year revolving loan yielding LIBOR plus 225 bps; a $2.5 billion, three-year term loan (Facility A), also yielding LIBOR plus 225 bps; and a $4 billion, five-year term loan (Facility C) with a spread of LIBOR plus 275 bps. The spreads would drop as Alibaba's total leverage decreased. (See Exhibit 7 for spreads and fees for this loan). Initial Public Offering 12 The company continued with its fund-raising. In May 2014, Alibaba filed with the U.S. Securities and Exchange Commission (SEC) to go public. Alibaba's underwriters estimated the company's fair value would reach $50 per share.13 On September 19, 2014, Alibaba went public at $68 per share. Its price rose to $93.89 on the first day of trading for a first-day return of 38 per cent. Its market capitalization reached $231 billion.14 Alibaba received $25 billion and claimed the title of the largest IPO in the history of the NYSE.15 ACQUISITION SPREE IN 2014 In 2014, Alibaba made numerous investments and acquisitions. Among others, the company invested $692 million in Intime Retail Group, a chain of department and grocery stores.16 It also acquired a 60 per cent stake in Chinavision, a Chinese entertainment company, for approximately $800 million.17 Other notable investments included Tango, a messaging app ($280 million); Lyft, a ride-sharing app ($250 million); Youku Tudou, a Chinese online video provider ($1.22 billion); China Smart Logistics Network, a logistics platform for e-commerce ($269 million); Singapore Post ($250 million); UCWeb, a mobile browser and search engine (undisclosed amount); AutoNavi Holdings Ltd., a Chinese digital mapping and navigation company ($294 million); and Huayi Brothers, China's largest private-sector film company ($581 million).18 It seemed that the company was spending substantial amounts of cash on these investments and had no intention of slowing down. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 3 9B17N001 GOVERNANCE Ownership Structure 19 Alibaba's senior management, consisting of 28 partners, had a right to nominate the majority of candidates for the company's board of directors. These directors would have to be approved by the shareholders. Alibaba's vice-chairman, Joseph Tsai, claimed that this structure allowed management to focus on the longterm interest of the company and would, therefore, be beneficial to shareholders. The structure was meant to sustain the company's culture and innovation. Other Internet companies that had also gone public with similar structures included Facebook, Google, and LinkedIn. At all of these companies, founders and top executives exerted control through superior voting shares. Tsai said on Alibaba's web site: [W]e have also noticed that many great companies quickly deteriorate after their founders leave; in the same vein, a number of successful founders have also made fatal mistakes. The final governance structure we have selected is to replace founders with partners. The reason is simplea group of partners who cherish the same culture and ideals is more likely to carry forward our principles and make good decisions for all stakeholders with a long-term view. And in the decade to come, those partners will be guided by these principles when grappling with inevitable disruption and competition. We believe this partnership system is the right way to build a sustainable business: partners are peers and, without bureaucracy or rigid hierarchy, they solve problems through collaboration. Partners are not just managers, but they are owners of the business with a keen sense of responsibility. The partnership is rejuvenated each year through admission of new partners and, as such, it provides both continuity and longevity because it is a living body. With this system, we believe we can sustain the flame of innovation and constantly improve the talent pool of people who run the Alibaba business.20 Variable-Interest Entities (VIEs) The Chinese government restricted foreign direct ownership in certain industries such as Internet content providers (ICPs). In order to circumvent these restrictions, Chinese companies designed variable interest entities (VIEs) that allowed these companies to invite foreign investment while staying within the Chinese law. The VIEs held the licenses to do business in China and paid fees and royalties to offshore holding companies based on the contractual agreement between the two. In the case of Alibaba, the licenses to operate various websites in China were held by VIEs that were majority-owned (between 80 and 90 per cent) by Jack Ma, founder and chairman of Alibaba, and minority-owned by Simon Xie, an Alibaba co-founder.21 The Chinese government and courts maintained a neutral stand with respect to the use of VIEs.22 There were signs that the Chinese government was considering a new law that would legitimize the VIE structure. Foreign-listed Chinese companies (such as the web services company Baidu) as well as Hong Kong-listed companies (such as the Internet service portal Tencent) used the VIE structure. Typically, Chinese companies listed the uncertainty related to VIE structures in an IPO prospectus. Specifically, Alibaba stated the following in its filing: The contractual arrangements give us effective control over each of the variable interest entities and enable us to obtain substantially all of the economic benefits arising from the variable interest entities as well as consolidate the financial results of the variable interest entities in our results of operations. Although the structure we have adopted is consistent with longstanding industry This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 4 9B17N001 practice and is commonly adopted by comparable companies in China, the PRC [People's Republic of China] government may not agree that these arrangements comply with PRC licensing, registration, or other regulatory requirements, with existing policies, or with requirements or policies that may be adopted in the future. [T]hese contractual arrangements may not be as effective as direct ownership in providing [Alibaba] with control over [its] variable interest entities.23 MARKET CONDITIONS Federal Reserve Interest Rates When the economy slowed, the Federal Reserve (the Fed) encouraged banks to make more loans. It did so by reducing the interest rate at which banks borrow money overnight, making it cheaper for banks to lend. During the global financial crisis of 2007-2008, the Fed reduced the overnight interest rate to almost zero.24 The low interest rate environment, together with quantitative easing and some other measures taken by the Fed, kept the U.S. economy going for several years after the global financial crisis. This environment made it favourable for companies to issue debt. The financial climate in 2014 was great for corporations interested in raising money through fixed income instruments. Specifically, more than $3 trillion of global corporate bonds were issued in the United States that year, making 2014 a record-breaking year for corporate bonds issues.25 Treasury yields dropped to new lows: the yield on the 10-year Treasury fell from 3.00 per cent on January 1, 2014 to 2.34 per cent on October 31, 2014 (see Exhibits 8 and 9). At the same time, low default rates encouraged investors and contributed to increased demand for corporate bonds.26 However, the International Monetary Fund (IMF) warned that \"more than half a decade in which official borrowing costs have been close to zero had encouraged speculation rather than the hoped-for pick-up in investment.\"27 In fact, Jos Vials, the IMF's financial counsellor, said, \"Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth but increasing excesses in financial risk-taking posing stability challenges.\"28 Additionally, senior Fed officials, such as James Bullard and Charles Plosser, were advocating higher interest rates.29 The concerns of the IMF, the arguments of the Fed officials, and the tapering (reducing) of quantitative easing that started in January 201430 caused market participants to worry that rates might start rising soon. Even though it was widely expected that the Fed would eventually move from low to more normal interest rates, this shift would probably be gradual since sudden change would likely lead to more volatility in financial markets. In agreement, on November 7, 2014, Federal Reserve Chair Janet Yellen said: I continue to anticipate that the headwinds associated with the financial crisis will wane. As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries based on differences in the pace of recovery in domestic conditions. This normalization could lead to some heightened financial volatility. But as I have noted on other occasions, for our part, the Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy in order to minimize the likelihood of surprises that could disrupt financial markets, both at home and around the world. More importantly, the normalization of monetary policy will be an important sign that economic conditions more generally are finally emerging from the shadow of the Great Recession.\"31 This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 5 9B17N001 China's Exchange Rate Policy China's central bank, the People's Bank of China (PBOC), maintained a policy of fixing the Chinese yuan's exchange rate with the U.S. dollar. Many analysts believed that China's exchange rate was kept historically low relative to the yuan's true value in order to keep China's exports cheaper. Because China's economy relied on exports, the bank's policy fostered growth in the country and reduced uncertainty.32 However, in order to achieve a fixed exchange rate, the PBOC needed to assure markets that it would exchange yuan for U.S. dollars at the fixed rate. If the yuan was indeed undervalued, Chinese exports would increase and exporters would have many U.S. dollars that they would need to exchange for yuan. In order to avoid a buying (upward) pressure on the yuan, the PBOC accumulated a reserve of U.S. dollars and Treasuries.33 The internationalization of the yuan accelerated in 2014.34 This meant that the yuan was circulating outside the jurisdiction of the PBOC.35 Some analysts predicted that at some point, the Chinese yuan would share equal status with the U.S. dollar, euro, pound, and yen.36 ALIBABA'S BOND RATINGS After announcing plans for a bond issue, Alibaba received its first debt rating: \"A-plus\" from Standard & Poor's and Fitch Ratings, and an equivalent \"A1\" rating from Moody's Investor Service.37 These ratings were considered to be investment grade. According to Standard & Poor's website, an obligor (bond issuer) with an \"A\" rating has a \"strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories [AAA and AA].\"38 Standard & Poor's also added that \"the ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories\"39 (see Exhibit 10). Exhibit 11 shows financial characteristics, while Exhibit 12 shows recent bond issues by similar companies. EPILOGUE Analysts wondered if investors would subscribe to the issue and how should Alibaba determine the pricing? Additionally, what would the best location for Alibaba's bonds be? When should the bonds be issued? Would investors subscribe to the issue? Analysts also wondered if investors would expect a country risk premium given that Alibaba was based in China. Additionally, certain governance issues (specifically, dual class ownership structures and VIEs) made some investors uneasy. A long week lay ahead. Emir Hrnji is a chief executive officer of the Centre For Islamic Banking, Finance, and Management (CIBFM), Autoriti Monetari Brunei Darussalam (AMBD). The author would like to thank the Centre for Asset Management Research & Investments (CAMRI) for the donation to this case and Xiang Yu Zhou for excellent research assistance. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 6 9B17N001 EXHIBIT 1: ALIBABA'S SELECTED FINANCIAL RESULTS AND RATIOS Total Revenues Operating Income Net Income to Common Shareholders Basic EPS (dollars) Diluted EPS (dollars) Total Assets Total Current Liabilities Total Long-Term Liabilities Total Liabilities Total Equity Gross Margin % Operating Margin % Profit Margin % Total Debt/Total Assets % Current Ratio Quick Ratio Asset Turnover % Return on Equity % Return on Assets % FY 2012 3,131.30 805.30 661.10 0.27 0.26 7,495.30 1,865.70 166.10 2,031.70 5,463.60 FY 2013 5,488.90 2,292.00 1,336.40 0.58 0.57 10,270.20 3,863.40 4,628.20 8,491.70 1,778.50 FY 2014 8,582.60 4,080.80 3,772.10 1.73 1.63 17,938.20 6,011.70 5,362.50 11,374.30 6,564.00 67.3 25.7 21.1 71.8 41.8 24.7 74.5 47.6 44.4 2.70 2.37 1.90 12.10 8.80 41.80 51.90 1.80 1.39 37.50 15.30 61.80 36.80 1.81 1.21 91.40 27.00 60.90 Note: Currency in $ millions, except where noted. Source: Bloomberg L.P., \"Alibaba's Financial Results and Ratios 2012-2014,\" Bloomberg Database, accessed December 23, 2014. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. (1,000) (131) (1,308) General and administrative expenses Amortization of intangible assets Impairment of goodwill and intangible assets Yahoo TIPLA amendment payment Other income, net Income (loss) before income tax and share of results of equity investees Income tax expenses Income (loss) from operations Interest and investment income (loss), net Interest expense (144) (2,335) Sales and marketing expenses 1,935 (327) (289) (181) (4) 68 549 384 200 1,322 (873) (1,724) (3,154) (2,062) (1,135) Product development expenses (3,497) (1,634) Cost of revenue 11,903 380 190 6,670 425 144 Total 3,433 2,620 International commerce Cloud computing and Internet infrastructure Others 7,665 CNY 2011 3,716 CNY 2010 Year ended March 31 (842) 5,532 327 (68) 258 5,015 (135) (155) (2,211) (3,058) (2,897) (6,554) 20,025 108 515 3,765 15,637 CNY 2012 (1,457) 10,112 894 (1,572) 39 10,751 (3,487) (175) (130) (2,889) (3,613) (3,753) (9,719) 34,517 540 650 4,160 29,167 CNY 2013 EXHIBIT 2: ALIBABA'S INCOME STATEMENT China commerce Revenue (in millions, except per share data) Page 7 (234) 1,627 144 (253) 6 1,730 (561) (28) (21) (465) (581) (604) (1,563) 5,553 87 105 669 4,692 US$ (1,362) 5,754 593 (1,113) (25) 6,299 (3,487) (175) (105) (2,344) (3,092) (2,899) (7,442) 25,843 317 484 3,117 21,925 CNY 2012 (1,969) 19,885 1,178 (1,842) 1,080 19,469 (44) (197) (3,704) (3,267) (3,893) (9,899) 40,473 1,189 560 3,557 35,167 CNY 2013 (317) 3,199 189 (296) 174 3,132 (7) (32) (596) (526) (626) (1,592) 6,511 192 90 572 5,657 US$ Nine months ended December 31 9B17N001 This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. 4,228 1.71 1,183 0.49 0.48 Diluted (511) (141) 2,280 Adjusted income (loss) from operations Adjusted net income (loss) Free cash flow 4,881 2,540 2,254 8,752 5,919 6,269 7,274 (6) 19,745 13,395 15,497 16,607 3.57 3.66 8,404 (111) (17) 8,532 (117) 8,649 CNY 2013 (1) 3,177 2,156 2,494 2,672 0.57 0.59 1,352 (18) (3) 1,373 (19) 1,392 US$ (9) 17,389 8,904 10,820 11,698 1.76 1.8 4,207 (59) (9) 4,275 (108) 4,383 CNY 2012 29,936 20,930 22,657 23,845 7.63 8.08 17,533 (156) (24) 17,713 (29) 17,742 (174) CNY 2013 4,816 3,367 3,645 3,836 1.23 1.3 2,820 (25) (4) 2,849 (5) 2,854 (28) US$ Nine months ended December 31 9B17N001 Source: Alibaba Group Holding Limited, \"Form F-1: Registration Statement under the Securities Act of 1933,\" EDGAR Online, May 6, 2014, accessed May 19, 2016, www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm. 1,390 Adjusted EBITDA 3,009 Supplemental information: 4,228 1,183 1.67 (437) (425) (0.34) 4,665 1,608 (25) CNY 2012 Net income (loss) (503) Net income (loss) attributable to non(299) controlling interests Net income (loss) attributable to Alibaba (802) Group Holding Limited Accretion of convertible preference shares Dividends accrued on convertible preference shares Net income (loss) attributable to (802) ordinary shareholders Earnings (loss) per share attributable to ordinary shareholders: Basic (0.34) CNY 2011 CNY 2010 Year ended March 31 EXHIBIT 2 (CONTINUED) (33) Share of results of equity investees (in millions, except per share data) Page 8 This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. 2.60 0.50 515 108 100.00 18.80 3,765 20,025 17.70 1.10 78.10 11.10 67.00 % of revenue 3,542 223 15,637 2,215 13,422 CNY 2012 34,517 540 650 4,160 3,768 392 29,167 2,197 26,970 CNY 5,553 87 105 669 606 63 4,692 353 4,339 US$ 2013 Year ended March 31 100.00 1.60 1.90 12.00 10.90 1.10 84.50 6.40 78.10 % of revenue 25,843 317 484 3,117 2,853 264 21,925 1,709 20,216 CNY 100.00 1.20 1.90 12.10 11.10 1.00 84.80 6.60 78.20 % of revenue 2012 40,473 1,189 560 3,557 2,904 653 35,167 1,706 33,461 CNY 6,511 192 90 572 467 105 5,657 274 5,383 US$ 2013 Nine months ended December 31 EXHIBIT 3: COMPONENTS OF ALIBABA'S REVENUE 100.00 2.90 1.40 8.80 7.20 1.60 86.90 4.20 82.70 % of revenue 9B17N001 Source: Alibaba Group Holding Limited, \"Form F-1: Registration Statement under the Securities Act of 1933,\" EDGAR Online, May 6, 2014, accessed May 19, 2016, www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm. Total Wholesale Total international commerce Cloud computing and Internet infrastructure Others Retail International commerce Total China commerce Wholesale Retail China commerce (in millions, except percentages) Page 9 This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Redeemable preference shares Non-current bank borrowings 26,493 28,402 9,413 807 37,830 34,383 12,797 1,283 47,210 11,791 2,463 2,483 21,744 CNY 2012 513 10,447 52,740 22,462 5,191 2,098 3,350 63,786 11,628 3,808 2,426 32,686 CNY 2013 83 1,680 8,484 3,613 835 337 539 10,261 1,871 612 390 5,258 US$ 23,892 10,235 72,805 30,226 8,884 1,200 107,058 13,250 5,973 15,311 48,962 CNY 2013 3,843 1,647 11,712 4,862 1,429 193 17,222 2,131 961 2,463 7,876 US$ As of December 31 9B17N001 Source: Alibaba Group Holding Limited, \"Form F-1: Registration Statement under the Securities Act of 1933,\" EDGAR Online, May 6, 2014, accessed May 19, 2016, www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm. Total equity Convertible preference shares 15,208 Secured borrowings Total liabilities Current bank borrowings 41,707 Total assets 1,905 1,666 11,846 3,933 2,250 11,518 15,940 CNY 2011 14,643 CNY 2010 As of March 31 EXHIBIT 4: ALIBABA'S BALANCE SHEET Goodwill and intangible assets Cash and cash equivalents and short-term investments Investment securities and investment in equity investees Property and equipment, net (in millions) Page 10 Page 11 9B17N001 EXHIBIT 5: SPREADS AND FEES FOR ALIBABA'S LOAN IN 2012 Upfront fees (participation fees) MLAB* MLA** Participants > $300 million > $200 million > $100 million Facility Maturity Interest margin (spread) $1B A 3 years LIBOR + 450 bps 300 bps 250 bps 200 bps $2B B 1 year LIBOR + 350 bps 175 bps 150 bps 125 bps Note: * MLABmandated lead arrangers and book runners; ** MLAmandated lead arrangers Source: Prakash Chakravarti, \"Alibaba Woos Lenders with Juicy Returns on US$3 Bn Loan,\" IFR: International Financing Review, March 10, 2012, accessed May 19, 2016, www.ifre.com/alibaba-woos-lenders-with-juicy-returns-on-us$3bnloan/21004924.article. EXHIBIT 6: FEES FOR ALIBABA'S LOAN IN 2012 Facility Maturity Blended fees Blended all-ins All-ins All-ins MLAB * > $300 million MLA ** > $200 million Participants > $100 million 217 bps 183 bps 150 bps LIBOR + 604.67 bps LIBOR + 582 bps LIBOR + 560 bps A 3 years LIBOR + 656 bps LIBOR + 631 bps LIBOR + 606 bps B 1 year LIBOR + 570 bps LIBOR + 550 bps LIBOR + 530 bps Note: * MLABmandated lead arrangers and book runners; ** MLAmandated lead arrangers; Blended feesaverage fees across two facilities; Blended all-insinterest margin plus annual fee, where annual fee is upfront fee divided by average life of loan Source: Prakash Chakravarti, \"Alibaba Woos Lenders with Juicy Returns on US$3 Bn Loan,\" IFR: International Financing Review, March 10, 2012, accessed May 19, 2016, www.ifre.com/alibaba-woos-lenders-with-juicy-returns-on-us$3bnloan/21004924.article. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 12 9B17N001 EXHIBIT 7: SPREADS AND FEES FOR ALIBABA'S LOAN IN 2013 Upfront fees (participation fees) > $500 > $300 > $200 million million million Facility Maturity Interest margin (spread) $1.5 billion Revolving 3 years LIBOR + 225 bps $2.5 billion A 3 years LIBOR + 225 bps 150 bps 125 bps 100 bps $4 billion C 5 years LIBOR + 275 bps 225 bps 200 bps 175 bps If the offshore groups' leverage drops to 2.0-1.5: Facility Maturity Interest margin (spread) $1.5 billion Revolving 3 years LIBOR + 200 bps $2.5 billion A 3 years LIBOR + 200 bps $4 billion C 5 years LIBOR + 250 bps If the offshore groups' leverage drops below 1.5: Facility Maturity Interest (spread) margin $1.5 billion Revolving 3 years LIBOR + 175 bps $2.5 billion A 3 years LIBOR + 175 bps $4 billion C 5 years LIBOR + 225 bps Source: \"Alibaba's USD 8 Billion Loan Allocated among 22 Banks; Signing Shortly,\" Debtwire, July 2, 2013. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 13 9B17N001 EXHIBIT 8: RECENT YIELDS AND SPREADS 10-Year History of Yields 10.0 9.0 8.0 Yield (%) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Mar-14 Aug-14 Aug-14 Oct-13 May-13 Dec-12 Jul-12 Feb-12 Sep-11 Apr-11 Nov-10 Jun-10 Jan-10 Aug-09 Mar-09 Moody's Baa Mar-14 Moody's Aaa Oct-08 May-08 Dec-07 Jul-07 Feb-07 Sep-06 Apr-06 Nov-05 Jun-05 Jan-05 0.0 10-year Treasury Note Spread: Moody's Seasoned U.S. 10-Year T-Note 7.0 6.0 Yield (%) 5.0 4.0 3.0 2.0 1.0 Aaa Rate - 10-Year T-Note Oct-13 May-13 Dec-12 Jul-12 Feb-12 Sep-11 Apr-11 Nov-10 Jun-10 Jan-10 Aug-09 Mar-09 Oct-08 May-08 Dec-07 Jul-07 Feb-07 Sep-06 Apr-06 Nov-05 Jun-05 Jan-05 0.0 Baa Rate - 10-Year T-Note Source: \"Selected Interest Rates (Daily): Historical Data,\" Board of Governors of the Federal Reserve System, accessed December 19, 2014, https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15. . This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 14 9B17N001 EXHIBIT 9: GOVERNMENT BOND YIELD CURVE 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1Y 2Y 3Y CNY Curve 5Y 7Y 10Y 30Y U.S. Treasuries Curve Source: Created by the author based on Bloomberg L.P., \"Bond yields,\" Bloomberg Database, accessed December 23, 2014. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 15 9B17N001 EXHIBIT 10: RATINGS FROM S&P RATING AGENCY AAA Extremely strong capacity to meet financial commitments; highest rating AA Very strong capacity to meet financial commitments A BBB Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances Adequate capacity to meet financial commitments, but more subject to adverse economic conditions BBB- Considered lowest investment grade by market participants BB+ Considered highest speculative grade by market participants BB B CCC Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial, and economic conditions More vulnerable to adverse business, financial, and economic conditions but currently has the capacity to meet financial commitments Currently vulnerable and dependent on favourable business, financial, and economic conditions to meet financial commitments CC Currently highly vulnerable C Currently highly vulnerable with obligations and other defined circumstances D Payment default on financial commitments Note: Ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. Source: \"RatingsDirect: Standard & Poor's Ratings Definitions,\" Standard & Poor's Ratings Services: McGraw Hill Financial, November 20, 2014, accessed October 6, 2016, www.spratings.com/documents/20184/86966/Standard+%26+Poor%27s+Ratings +Definitions/fd2a2a96-be56-47b8-9ad2-390f3878d6c6. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. 27.10B -- 17.51B 7.24B 85.25B 12.19B 47.30B 38.82B 11.20B 10.31B 64.76B Net Sales T12M 14.95% 0.57 15.46 28.67 2.12 28.56 14.93 26.07 25.04 17.99 17.02 Profit Margin 1.25 -- 0.08 5.91 0.47 0.39 1.49 2.44 1.08 -- -- Trailing 12M EPS 51.48 -- -- 39.88 -- 39.19 16.77 18.92 74.67 -- -- P/E 11.67 5.44 3.61 10.45 13.34 11.65 2.5 4.26 9.63 13.56 -- P/B EXHIBIT 11: COMPARABLES Source: Created by the author based on Bloomberg L.P., Bloomberg Database, accessed December 23, 2014. 138.16B 137.85B Amazon.com Inc Average 139.75B Tencent Holdings Ltd 33.54B 142.00B Cisco Systems Inc Jd.com Inc 202.00B Oracle Corp 71.47B 219.25B Facebook Inc Ebay Inc 269.30B Alibaba Group 81.30B 347.81B Google Inc Baidu Inc Mkt Cap (US$) Name Page 16 21.92% -- 0.60 30.50 2.22 34.25 13.30 23.81 16.04 -- 14.37 ROE -- 0.30 16.42 0.60 17.12 7.51 11.87 14.05 -- 11.32 ROA 10.32% * 41.19% 7.51 38.34 48.40 29.98 45.49 36.98 67.67 1.31 49.23 5.30 Debt / Equity 19.62 -48.7 -- 22.12 11.1 22.14 16.85 12.56 -- 8.34 148.96 TIE 3.36 1.8 1.56 3.25 0.89 1.59 3.31 4.34 13.06 3.01 4.47 Current Ratio 9B17N001 This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. 2014-07-28 1.15 2014-04-29 2014-04-29 0.5 2 Tencent Holdings Limited 2014-06-09 1 Baidu, Inc. 2013-08-06 1 2014-07-08 1 2014-07-08 1.5 2014-07-08 2014-07-08 2 1.75 2013-07-16 1 2014-07-08 2013-07-16 1.5 2 2014-02-25 1 2014-07-28 2014-03-01 1 0.75 2014-03-01 0.5 2014-07-28 2014-03-01 1.75 0.75 2014-03-01 Issue Date 2.4 Amt. Issued (US$ Billion) Baidu, Inc. Oracle Corporation Oracle Corporation Google Inc. eBay Inc. Cisco Systems, Inc. Issuer Name 5 3 5 5 30 20 10 7 5 10 5 10 10 7 5 10 7 5 3 Term (Years) 3.375 2 2.75 3.25 4.5 4.3 3.4 2.8 2.25 3.625 2.375 3.375 3.45 2.875 2.2 3.625 2.9 2.125 1.1 Coupon (%) EXHIBIT 12: RECENT BOND ISSUES Source: Created by the author based on Bloomberg L.P., Bloomberg Database, accessed December 23, 2014. Chinese Companies U.S. Companies Page 17 A3 A3 A3 A3 A1 A1 A1 A1 A1 A1 A1 Aa2 A2 A2 A2 A1 A1 A1 A1 Moody's A- A- NA NA A+ A+ A+ A+ A+ A+ A+ AA A- A- A- AA- AA- AA- AA- S&P 3.398 2.070 2.905 3.288 4.502 4.302 3.430 2.824 2.273 3.748 2.446 3.376 3.463 2.912 2.247 3.634 2.931 2.140 1.102 YTM (%) 1.658 1.160 1.265 1.888 1.082 1.142 0.830 0.634 0.593 1.108 0.966 0.646 0.973 0.772 0.557 0.944 0.791 0.620 0.412 Spread over similar Treasury Bonds (%) 9B17N001 Page 18 9B17N001 ENDNOTES 1 This case has been written on the basis of published sources. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Alibaba Group or any of its employees. 2 Jackie Horne, \"Alibaba to Bond with Investors (In a Big Way),\" Finance Asia, November 14, 2014, accessed January 19, 2015, www.financeasia.com/News/392103,alibaba-to-bond-with-investors-in-a-big-way.aspx. 3 \"What Is Alibaba? It Is a Marketplace, a Search Engine and a Bank, All in One,\" Wall Street Journal (blog), accessed May 28, 2015, http://projects.wsj.com/alibaba. 4 Aswath Damodaran, \"Alibaba: A China Story With a Profitable Ending?,\" Musings on Markets: My Not-so-profound Thoughts about Valuation, Corporate Finance and the News, (blog), May 9, 2014, accessed June 16, 2014, http://aswathdamodaran.blogspot.sg/2014/05/alibaba-china-story-with-profitable.html. 5 All currencies are in US$, unless otherwise stated. = CNY = Chinese yuan Renminbi; US$1 = 6.1475 in September 2014. 6 \"What Is Alibaba?,\" op. cit. 7 Don Dion, \"Yahoo's Alibaba Prepares for IPO as Its Online Sales Are Set to Explode,\" Seeking Alpha (blog), November 11, 2013, accessed May 19, 2016, http://seekingalpha.com/article/1828522-yahoos-alibaba-prepares-for-ipo-as-its-online-salesare-set-to-explode. 8 Adapted from Emir Hrnji and David Reeb, Financing Alibaba's Buyout: Syndicated Loan in Asia (London, ON: Ivey Publishing, 2014). Available from Ivey Publishing, product no. 9B14N011. 9 \"Alibaba's Bank Meeting for USD 3 Billion Loan Attracts over 20 Banks,\" Debtwire, March 20, 2012. 10 \"Emerging Markets: Best Debt-Related Deals of 2012,\" Global Capital, December 13, 2012, accessed May 19, 2016, www.globalcapital.com/article/k35xq3k1dbgb/best-debt-related-deals-of-2012. 11 \"Alibaba Group Signs USD 1 Billion Four-Year Loan Deal with Eight Banks,\" Debtwire, August 27, 2012. 12 Adapted from Emir Hrnji, Alibaba's IPO Dilemma: Hong Kong or New York? (London, ON: Ivey Publishing, 2014). Available from Ivey Publishing, product no. 9B14N035. 13 Alexei Oreskovic and Deepa Seetharaman, \"China's Alibaba Files in U.S. for What May Be Biggest Tech IPO,\" Reuters, July 14, 2014, accessed July 31, 2015, www.reuters.com/article/2014/07/14/us-alibaba-ipo-us-idUSKBN0FJ0BV20140714. 14 Telis Demos and Juro Osawa, \"Alibaba Debut Makes a Splash: Chinese E-Commerce Giant's Stock Jumps 38% in First Day of Trading,\" Wall Street Journal, September 19, 2014, accessed November 25, 2014, http://online.wsj.com/articles/alibaba-shares-trade-higher-in-ipo-1411142120. 15 Liyan Chen, Ryan Mac, and Brian Solomon, \"Alibaba Claims Title for Largest Global IPO Ever with Extra Share Sales,\" Forbes, September 22, 2014, accessed January 20, 2014, www.forbes.com/sites/ryanmac/2014/09/22/alibaba-claims-titlefor-largest-global-ipo-ever-with-extra-share-sales. 16 Kyle Anderson, \"Alibaba IPO: Latest Acquisition Brings e-Commerce to Department Stores,\" Money Morning, April 3, 2014, http://moneymorning.com/2014/04/03/alibaba-ipo-latest-acquisition-brings-e-commerce-to-department-stores/. 17 Charles Clover, \"Alibaba Buys Majority Stake in ChinaVision,\" Financial Times, March 11, 2014, accessed May 19, 2016, www.ft.com/intl/cms/s/0/2db9113e-a91d-11e3-9b71-00144feab7de.html#axzz4971ka2yX. 18 Paul Bischoff, \"Jack Ma's Shopping Spree: Here's Everything Alibaba Invested In or Acquired in 2014,\" Tech in Asia, December 23, 2014, accessed January 20, 2015, www.techinasia.com/alibaba-investments-2014. 19 Hrnji, \"Alibaba's IPO Dilemma,\" op. cit.; Joe Tsai, \"Alibaba Offers an Alternative View of Good Corporate Governance,\" Alizila: E-commerce News & Commentary from the Alibaba Group, September 26, 2013, accessed January 20, 2015, www2.alizila.com/alibaba-offers-alternative-view-good-corporate-governance. 20 Tsai, op. cit. 21 Alibaba Group Holding Limited, \"Form F-1: Registration Statement under the Securities Act of 1933,\" EDGAR Online, May 6, 2014, accessed May 19, 2016, www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm. 22 Dinny McMahon, \"Alibaba and VIEs: A Primer,\" The Wall Street Journal, May 6, 2014, accessed January 23, 2015, http://blogs.wsj.com/moneybeat/2014/05/06/alibaba-and-vies-a-primer. 23 Alibaba Group Holding Limited, op. cit. 24 R. A. \"The Economist Explains: What Is Quantitative Easing?,\" The Economist, March 9, 2015, accessed January 20, 2015, www.economist.com/blogs/economist-explains/2014/01/economist-explains-7. 25 Maureen Farrell, \"How Alibaba's New Bond Deal Stacks Up,\" The Wall Street Journal, November 20, 2014, accessed January 21, 2015, http://blogs.wsj.com/moneybeat/2014/11/20/how-alibabas-new-bond-deal-stacks-up. 26 Lipper Alpha Insight, "Investment-Grade Corporate Bond Fund Demand Stabilizes on Relatively Attractive Yields and Fundamentals,\" Thomson Reuters, June 6, 2014, accessed January 21, 2015, http://lipperinsight.thomsonreuters.com/2014 /06/investment-grade-corporate-bond-fund-demand-stabilizes-relatively-attractive-yields-fundamentals. 27 Larry Elliott, \"IMF Warns Period of Ultra-Low Interest Rates Poses Fresh Financial Crisis Threat,\" The Guardian, October 8, 2014, accessed January 20, 2015, www.theguardian.com/business/2014/oct/08/imf-low-interest-rates-financial-crisisthreat-speculation. 28 Ibid. 29 Chris Matthews, \"Yellen: Don't Blame the Financial Crisis on Low Rates,\" Fortune, July 2, 2014, accessed January 20, 2015, http://fortune.com/2014/07/02/janet-yellen-federal-reserve-interest-rates. 30 Joshua Zumbrun, \"Fed Trims QE Pace to $75 Billion on Labour Market Outlook,\" Bloomberg, December 18, 2013, accessed January 20, 2015, www.bloomberg.comews/2013-12-18/fed-cuts-qe-pace-to-75-billion-on-improved-job-marketoutlook.html. 31 Steve Goldstein, \"Yellen: Monetary Policy Will Eventually Need to Normalize,\" Market Watch, November 7, 2014, accessed July 31, 2015, www.marketwatch.com/story/yellen-monetary-policy-will-eventually-need-to-normalize-2014-11-07. 32 \"China's Exchange Rate Policy,\" ECR Research, accessed June 1, 2015, www.ecrresearch.com/chinas-exchange-ratepolicy. This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017. Page 19 9B17N001 33 Ibid. For more information about internationalization of the CNY, please see Emir Hrnji and Han Dong, OCBC Versus Elliott Management: Acquisition of Wing Hang Bank (London, ON: Ivey Publishing, 2015). Available from Ivey Publishing, product no. 9B15N010. 35 Yi Zianrong, \"China Accelerates RMB Internationalization Process,\" CCTV Com: English, November 20, 2014, accessed June 1, 2015, http://english.cntv.cn/2014/11/20/ARTI1416477609100365.shtml. 36 Ibid. 37 Supantha Mukherjee and Ted Kerr, \"Alibaba Gets 'A-Plus' Debt Rating from Agencies,\" Reuters, November 13, 2014, accessed January 20, 2015, www.reuters.com/article/alibaba-group-ratings-idUSL3N0T36S420141113. 38 \"Ratings Direct: Standard & Poor's Ratings Definitions,\" Standard & Poor's Ratings Services: McGraw Hill Financial, 5-8, November 20, 2014, accessed October 6, 2016, www.spratings.com/documents/20184/86966/Standard+%26+Poor%27s +Ratings+Definitions/fd2a2a96-be56-47b8-9ad2-390f3878d6c6. 39 Ibid. 34 This document is authorized for use only in John Watson's BFF5300 Case studies in finance course at Monash University, from June 2017 to December 2017