Alibaba Group is at it again. Last week it sent out a request for proposals for an $8bn loan. The size of the deal has fuelled scepticism from bankers familiar with the company, who fear the market is not liquid enough to support such a large loan. But if you read the signs closely enough, the deal certainly seems do-able for Alibaba.
The group is no stranger to jumbo loans and has proved time and again that it is more than capable of raising large sums of money from the loan market. It borrowed $3bn in syndication early last year, getting demand from a group of 19 lenders, and followed this up within six months — refinancing the whole amount when margins dropped, and astutely adding another $1bn on top to take advantage of falling pricing.
It should also get a good reception this time around, even though its loan will be a lot bigger than the previous deals. Alibaba is a well-known company with a stellar reputation in the e-commerce sector, and it already has established relationships with a host of lenders. That will help ensure a minimum level of demand for the deal.
Lenders on the old deal will still be attracted to the company’s credit rating and will want a slice of the new loan. Although the margin is expected to be tighter than before, most lenders will be willing to commit anyway and will shrug it off as the “relationship price”.
The timing also plays well into the company’s hands. It is tapping the loan market at a point when Taiwanese banks are out in full force. They have almost always been a reliable source of demand for Asian borrowers, often taking out junior levels of loans entirely. But now they are willing to commit larger chunks than before, showing clearly that they are hungry for bigger bites of deals. They are now an obvious source of demand for a jumbo deal like this.
It also bodes well that when Alibaba was looking for a $1bn bridge last year, it closed a bilateral deal with China Development Bank. That the company managed to raise the whole amount from one Chinese bank gives confidence to other lenders, who may be wary of being part of such a large loan.
The use of proceeds will also please lenders. The company plans to use half of the money raised to refinance last year’s debt — meaning the net additional borrowing will be $4bn — and the rest to fund the buyback of shares from Yahoo.
There are, clearly, a multitude of factors in the company’s favour. Alibaba is known for rapidly refinancing to cheapen its funding costs, which will in turn reduce the juicy returns that lenders can make when margins fall across the board.
This knowledge might deter some banks from making big commitments but, if the past is any guide, there will be plenty of other lenders hungry to replace them.