Alibaba is considering issuing bonds to raise funds. It is debating whether to issue the bonds in the US or China. Issuing in the US may help Alibaba avoid some risks, such as political risk from the Chinese government changing policies around foreign investment. However, issuing in China could expose Alibaba to exchange rate risk if the USD appreciates against the RMB. Overall, now is a good time for Alibaba to issue bonds given its strong credit ratings and current low interest rate environment.
Alibaba is considering issuing bonds to raise funds. It is debating whether to issue the bonds in the US or China. Issuing in the US may help Alibaba avoid some risks, such as political risk from the Chinese government changing policies around foreign investment. However, issuing in China could expose Alibaba to exchange rate risk if the USD appreciates against the RMB. Overall, now is a good time for Alibaba to issue bonds given its strong credit ratings and current low interest rate environment.
Alibaba is considering issuing bonds to raise funds. It is debating whether to issue the bonds in the US or China. Issuing in the US may help Alibaba avoid some risks, such as political risk from the Chinese government changing policies around foreign investment. However, issuing in China could expose Alibaba to exchange rate risk if the USD appreciates against the RMB. Overall, now is a good time for Alibaba to issue bonds given its strong credit ratings and current low interest rate environment.
Alibaba is considering issuing bonds to raise funds. It is debating whether to issue the bonds in the US or China. Issuing in the US may help Alibaba avoid some risks, such as political risk from the Chinese government changing policies around foreign investment. However, issuing in China could expose Alibaba to exchange rate risk if the USD appreciates against the RMB. Overall, now is a good time for Alibaba to issue bonds given its strong credit ratings and current low interest rate environment.
Pricing Assignment Name: Taimoor Khan Roll# I16-0773 Section: B
Q1. Should Alibaba Issue the Bonds in United states or China?
ANS. I think Alibaba should issue the bond in the United states due to the following reasons: Alibaba has a high profit margin, and controls dominant shares and has few competitors, so the business risk of alibaba is very low. Due to the reasonable D/A ratio, current ratio and quick ratio, the proceeds from the bonds issued can be used to repay the syndicated loan and will not affect the leverage, the financial risk of alibaba is very low too. Both of them will not affect the debt issued. The problem Alibaba might face issuing bonds in China is the Political risk. Because chinese government restricted foreign direct ownership in internet content providers, chinese companies must use variable interest entities (VIEs) to invite foreign investment while staying within the chinese law. However chinese government wants to change its neutral attitude towards VIPs. If the government thinks VIEs do not comply with PRC licencing, registration or other requirements, the bonds and stocks held by foreign investors may be influenced by chinese government, and it will be more difficult for Alibaba to issue the bond. Exchange risk is also important for Alibaba. Most of Alibaba’s businesses are in china, and they earn in RMB. However, Alibaba will raise funds in USD, so they must exchange RMB for USD when they repay the debt. If the federal reserves increase the interest rate in the United states, USD will appreciate and so Alibaba will need to use more RMB to repay its debt. Issuing bonds in U.S will provide Alibaba with new opportunities outside its core business location i.e China.
3. How does Financing with bonds differ from Alibaba’s previous form of debt financing with syndicate loans? ANS. a syndicated loan is a loan offered by a group of lenders. When the loan is too large for a single lender or a project needs a specialized lender with expertise in specific asset class.syndicating makes lenders spread risk and take part in financial opportunities that may be too large for their individual capital base. Interest rates on this type of loan can be fixed or floating, based on LIBOR. Corporate bonds are not offered by some lenders, they are issued by a corporate and sold to a variety of investors. They are not like syndicate loans. Bonds can trade in decentralized, dealer based, OTC markets. Interest rates of bonds are determined by credit rating. Higher credit rating, lower the interest rate.
Q4.Calculate and Explain the term structure of the Interest rate of China and the United states. Which is more feasible and why? ANS. Term structure of interest rates, commonly known as the yield curve, depicts the interest rates of similar quality bonds at different maturities. The term of the structure of interest rates has three primary shapes. Upward sloping—long term yields are higher than short term yields. This is considered to be the "normal" slope of the yield curve and signals that the economy is in an expansionary mode. Downward sloping—short term yields are higher than long term yields. Dubbed as an "inverted" yield curve and signifies that the economy is in, or about to enter, a recessive period. Flat—very little variation between short and long term yields. Signals that the market is unsure about the future direction of the economy. Estimation: method is to assume a single functional form between the spot rate and maturity with unknown parameters. When discounting the coupon payments of a bond, instead of using a constant rate as in the case of calculating the yield to maturity, the Svensson method uses different spot interest rates for different maturities. For example, the first-year coupon payment is discounted using the one year spot interest rate, the second year coupon payment is discounted using the two-year spot interest rate. For any particular bond, the present value of all its coupon payments and principal is calculated using the assumed spot rate function. The difference between this present value and the actual bond price is then calculated. If the market is efficient and the assumed functional form is accurate, this difference should be very small.
China’s term structure of interest calculated.
As we can see the curve is an upwards-sloping curve,However, the curve flattened a bit, suggesting that the market expected a smaller rise in future short-term interest Rates, probably reflecting the effect of the tightening measures implemented during the period, thus depicting that china’s economy is in expansionary mode.
USA’s term structure calculated
This curve is an upwards sloping curve, The yields of longer-maturity bonds tend to be higher than the yields of shorter-maturity bonds since the longer maturity bonds are riskier. This is because changes in market conditions have a greater impact on the prices of longer maturity bonds than shorter maturity bonds; and There is more uncertainty over market conditions that take place further in the future. Q5. Discuss the different risks Alibaba is facing. ANS. Alibaba is facing different kinds of risks in particular. 1. Business 2. Financial 3. Political 4. Policy 5. Foerign exchange Business risk: Alibaba has high profit margin of approx 44%, Roe 27%, and ROA 60% and at the same time this company controls dominant market shares with few competitors, so the business risk of Alibaba is going to be low.
Financial risk: with a reasonable D/A ratio of 36%, current ratio of 1.8, and quick ratio of 1.21. And because of the issuance of bonds its proceeds can be used to pay syndicate loan thus making the financial risk of low.
Political risk: Alibaba faces high political risk, because chinese government restricted foregin direct ownership of internet content providers.
Policy risk: the policies in China are very strict thus having a high policy risk.
Foreign exchange risk: if the federal reserves increases the interest rate in the united states USD may appreciate thus making Alibaba o pay more in RMB.
Q7. Is this a good time for the company to issue bonds?
ANS. It is the right time for Alibaba to issue bonds for the following reasons: 1. Ratings agencies Fitch and S&P both assigned 'A+' ratings to Alibaba's corporate credit rating. S&P cited the company's "dominant market position in e-commerce in China and the company's minimal financial leverage. 2. Alibaba is taking advantage of current market conditions, with low inflation continuing to suppress long-term rates and flatten the yield curve, while the U.S. The Federal Reserve is increasing interest rates. 3. Alibaba's latest bond offering will also likely benefit from the so-called "China Bid" phenomenon -- a situation where strong demand from overseas units of mainland China institutions has pushed down the risk premium for familiar Chinese entities issuing foreign-currency bonds and other securities. 4. the proceeds from its latest bond issue will be put toward general corporate purposes, including working capital needs, repayment of offshore debt and potential acquisitions.
Q8. How would you price Alibaba’s bonds?
ANS. The price of a bond depends on several characteristics inherent in every bond issued. These characteristics are: Coupon, or lack thereof Principal/par value Yield to maturity Periods to maturity I would suggest The Time Value of Money method to price alibaba’s bonds. The Time Value of Money Bonds are priced based on the time value of money. Each payment is discounted to the current time based on the yield to maturity (market interest rate). Formula: P(T0) = [PMT(T1) / (1 + r)^1] + [PMT(T2) / (1 + r)^2] … [(PMT(Tn) + FV) / (1 + r)^n] Where: P(T0) = Price at Time 0 PMT(Tn) = Coupon Payment at Time N FV = Future Value, Par Value, Principal Value R = Yield to Maturity, Market Interest Rates N = Number of Periods.
