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Offering bonds in the United States will provide Alibaba with numerous advantages and disadvantages. The first advantage is that bonds are Alibaba will not give away ownership interest because they will not affect the company’s structure. Secondly, bonds will provide flexibility for Alibaba since the company can issue bonds of varying payments terms, value, convertibility, and duration. Thirdly, bonds will expand the number of available investors for Alibaba. In most cases, investors consider bonds to be a less risky investment. The ratings given to Alibaba’s bonds indicate lower-risk returns, attracting more investors. Finally, investors will be attracted to the bond issued by Alibaba due to its high liquidity levels than other investments.
On the other hand, bonds will be disadvantageous to Alibaba because they are debt. The company must make its bond interest payments to repay the debts. In cases where Alibaba cannot make interest payments, bondholders have the power to force it into bankruptcy. In bankruptcy, bondholders have a liquidation preference over the shareholders. Therefore, issuing bonds means that Alibaba will prioritize bondholders over the investors. Another disadvantage is that bonds can make Alibaba load itself with too much debt, leading to face value payments.
In 2012 and 2013, Alibaba raised its funds through syndicated loans. These loans vary in duration and their maturity from on-year to five years after being issued to the company. In addition, the loans were syndicated by underwriters ranging from number five to nine. Further on, the floating rate of these loans was according to the London Interbank Offered Rate (LIBOR). The money raised from these syndicated loans was put to various uses, including stock buybacks. However, bonding financing was different from syndicated loans because Alibaba had raised it from private equity investors.
When Alibaba became a publicly-traded company, it exposed itself to numerous risks. One of the main risks is that it is exposed to uncertain revenue growth recorded in its financials. For instance, from 2010 to 2013, its revenue grew by 400% because it was booking sales in billions. Due to this, the company is at risk of investors expecting a certain amount of upside when they put their money in the company, and sometimes these upside amounts can be unreasonable. In addition, uncertainty is likely to happen due to a lack of agreement between the company and customers to lock its growth. Therefore, maintaining revenue growth at the current levels is not guaranteed for the company.
The company’s filing has revealed that the cash reserves of $7billion and has a lot of debt. Before issuing bonds, the company had exhausted all the funding it had acquired from syndicated loans. In addition, the company has continued to increase its non-current bank debt, which is at $4.86billion. If the company continues with this debt trend without making payments, it is at risk of having a debt load that is relatively high in the future.
Due to the debt that Alibaba has, it is the best time to issue bonds because it will raise more funds that will help repay its creditors. In addition, offering bonds will increase investors in the company since it does not affect the company’s ownership structure. Further, bonds increase credit score of Alibaba since the bonds will not be offered under the parent company name, but finances channeled to the bonds will be brought to the company.
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