Speculators gobble up Alibaba bonds
Strong demand for Alibaba's newly issued bonds testifies to its popularity among investors, especially short-term traders, and the debt is likely to see high trading volumes before activity settles down next year.
I do think these bonds look like a reasonably safe bet, since Alibaba is unlikely to default on any of the debt that carries terms of up to 10 years. But people more knowledgeable about this kind of thing also point out that Alibaba is paying a premium that is much lower than one would normally expect compared to much safer products like US treasuries. That would seem to indicate that people buying the debt aren't interested in the yield of the bonds, and instead are probably just hoping to sell it quickly at higher prices to make some quick profits.
Alibaba's plans for the money weren't too exciting, with the company previously saying it would use much of the money to refinance current debt. That's probably the best strategy for Alibaba right now anyhow, since the company is already overloaded with cash, with nearly $18 billion in its coffers at the end of September.
So, what else can we say about this bond offering besides yet another "congratulations" to founder Jack Ma for generating such strong demand for his company's debt? There's not really much left to say about Alibaba, since I've already said that it's almost certain to repay the debt with very little risk of default.
From an investor's perspective, I do think that this debt will quickly become the plaything of hedge funds and other short term investors looking to make a quick profit. That's what's already happened to Alibaba's stock, which is currently up 62 per cent from its IPO price despite a recent pull-back that has seen the shares drop 8 per cent from an all-time high last week. Prices for the bonds are likely to see equal volatility as they get rapidly bought and sold by speculative buyers. I do expect that trading and prices will probably settle down as we head into 2015, after which time buyers will have to settle for relatively low yields compared with debt from other Chinese companies.
Bottom line: Strong demand for Alibaba's newly issued bonds testifies to its popularity among investors, especially short-term traders, and the debt is likely to see high trading volumes before activity settles down next year.