By Mike Cherney
Wall Street has a new favorite customer: Alibaba Group Holding
Ltd.
The Chinese e-commerce company has emerged as this year's
biggest source of fees for banks working on capital-markets deals.
After its $25 billion initial public offering in September, the
largest in history, the Chinese Internet company on Thursday sold
$8 billion in bonds, one of the largest corporate-bond deals of the
year.
While fees weren't disclosed, the banks coordinating the
sale--led by Morgan Stanley, with assistance from Citigroup Inc.,
Deutsche Bank AG, J.P. Morgan Chase & Co. and seven
others--reaped millions of dollars for their efforts in finding
buyers for the bonds.
Morgan Stanley and the other banks coordinating the sale are
lenders to Alibaba under an $8 billion credit facility that has
already been used. Alibaba plans to use proceeds from the bond sale
to help pay off that $8 billion loan, which carries variable
interest rates tied to the overall market. The bonds sold Thursday
mostly carry fixed rates, potentially giving the company savings
over time should market rates rise.
When drugstore chain Walgreen Co. completed an $8 billion bond
sale this month, banks on the deal reaped nearly $40 million,
according to a securities filing.
Banks have collected more than $35 billion in fees so far this
year on new stock and bond offerings, according to data provider
Dealogic, up from about $32 billion at this time last year. Alibaba
is already the largest payer of underwriting fees to banks this
year, dispensing $291 million to the arrangers of its September
IPO, according to Dealogic.
Alibaba has eclipsed firms such as Canadian energy company
Encana Corp., French telecommunications firm Numericable Group SA
and Japanese real-estate company Mitsui Fudosan Co. to top the
rankings of the most lucrative underwriting clients globally this
year, according to Dealogic figures.
The underwriting boom alone won't fill in the gaps for banks
under pressure amid soft trading and low interest rates.
Underwriting fees are just a fraction of the revenue generated by
securities sales and trading, for example.
In an unusual move, Alibaba insisted that there be no lead bank
on its initial share offering. The company listed five banks on the
deal in alphabetical order-- Credit Suisse Group AG, Deutsche Bank
AG, Goldman Sachs Group Inc., J.P. Morgan and Morgan Stanley--to
reflect their equal base fees for the deal, with a sixth lead bank,
Citigroup, listed after them because it received a smaller base
fee, people familiar with the deal have said.
Alibaba intended the arrangement to reward each of the banks for
prior work with the company and to maintain future relationships,
though some bankers were frustrated that the initial pay didn't
reflect different roles in the deal, the people said.
The $291 million IPO fee reflected a pay rate of 1.2%, which was
slightly more than the 1.1% Facebook Inc. paid in its $16 billion
IPO, completed in 2012. It was still far less than the typical 6%
to 7% awarded in most IPOs.
Morgan Stanley began discussing the bond sale with Alibaba as
many as 18 months before the IPO, people familiar with the deal
said. The company chose to sell the bonds this week in part because
investors had a chance to review Alibaba's first quarterly earnings
as a publicly traded company. Market conditions were good and the
Thanksgiving holiday--when bond markets are closed--is coming up,
the people said.
Investors said demand for the Chinese company's debt was robust,
underscoring the hefty appetite for income-generating investments
at a time of uneven global growth and low interest rates. Alibaba
received as much as $55 billion in orders for the debt, said people
familiar with the deal, joining other technology companies such as
Apple Inc., Oracle Corp. and Cisco Systems Inc. in completing
multibillion-dollar bond sales in 2014.
Strong demand sent yields lower. A five-year bond, for example,
was initially offered to yield about 1.10 percentage points more
than comparable Treasurys earlier in the week, but that figure fell
to 0.95 percentage point on Thursday, for a yield of 2.582%. In
total, Alibaba's deal came in six parts, with maturities ranging
from three to 20 years.
Kent White, director of investment-grade research at Thrivent
Asset Management, which oversees about $92 billion, said his firm
purchased some of the Alibaba bonds for mutual funds, citing the
company's strong earnings and dominant market position.
"My analyst liked it over eBay and Amazon," Mr. White said.
The bonds yielded a little more than comparable companies. A
2019 bond from eBay Inc., for example, traded recently at a yield
of 2.509%.
Investors weren't surprised at the deal's strong reception. The
bond sale was "broadcast for some time, so people had time to
prepare for it, " said Michael Hyman, head of investment-grade
portfolio management at Invesco, which oversees about $241 billion
in fixed-income investments. Mr. Hyman declined to say whether his
firm bought the new bonds.
Alibaba announced last week that a sale was in the works.
Telis Demos contributed to this article.
Write to Mike Cherney at mike.cherney@wsj.com
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