Alibaba issues convertible bonds for $4.5 billion to invest in artificial intelligence

Alibaba Group Holding has made a $4.5 billion convertible bond issue, marking the largest sale of dollar-denominated debt by an Asian company. This move seeks to secure capital necessary to buy back shares and invest in key areas such as artificial intelligence, according to advertisement a company manager.

The Chinese e-commerce giant priced the bonds, due in 2031, with a coupon of 0.5% and a conversion premium of 30%. The offering was oversubscribed six times, attracting about 250 investors, according to a banker involved in the transaction.

Analysts highlight that Alibaba is taking advantage of low financing costs and the strong rise in its shares to raise funds. The company needs capital to invest in its core and cloud businesses, sectors that have lost market share due to regulatory crackdown and internal turmoil in China. The sale also reflects Alibaba’s perception that its shares are undervalued.

Part of the proceeds will be used to repurchase 14.8 million American depositary receipts (ADRs) and to fund future repurchases, according to a statement from Alibaba. John Choi, an analyst at Daiwa Capital Markets Hong Kong Ltd., said this is an opportunity to raise overseas cash on favorable terms, allowing for an immediate share buyback that would benefit shareholders more than the potential dilution.

Alibaba’s deal represents the largest dollar equity-linked debt issuance by an Asian company, surpassing Sea Ltd.’s $2.9 billion issuance of five-year notes in September 2021, according to Bloomberg data. The offering attracted strong participation from US-based funds, with the company prioritizing investors interested in buying the convertible debt and selling shares as a hedge.

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Convertible bonds allow companies to borrow funds at lower rates than regular loans, although they can affect share prices due to the possibility of converting debt into equity. Investors will be able to convert their bonds into shares if the price of Alibaba ADRs rises 30% from current levels. To mitigate the risk of dilution, Alibaba has included a “limited stock purchase trades” feature in the bonds, similar to a “bull call spread.”

Shares of Chinese technology companies have risen since February, boosted by signs of government support and attractive valuations. Alibaba’s sale follows an issuance of $2 billion in convertible bonds by JD.com Inc. earlier in the week.

Gary Tan, portfolio manager at Allspring Intrinsic Emerging Markets Equity, mentioned that technology companies are locking up US dollars offshore to maintain flexibility in share buybacks while investing overseas. However, he expressed some disappointment at the low conversion premium, suggesting that Alibaba’s transformation to resume growth is taking longer than expected.

Co-founder Jack Ma and Chairman Joe Tsai bought Alibaba shares for the first time in years in early 2024, highlighting their confidence in the company. Alibaba ADRs are up nearly 29% through May 17, although they closed Thursday down 2.3% to $80.80, while shares in Hong Kong were down 0.6% on Friday.

Alibaba is trying to balance returning cash with investing in existing and new businesses, including artificial intelligence, according to a letter to shareholders from Tsai and CEO Eddie Wu.