Alibaba announced on the Hong Kong Stock Exchange on Thursday that it plans to privately issue convertible senior notes with a total principal amount of US$4.5 billion and due in 2031. As soon as the news came out,$BABA-SW (09988.HK)$,$Alibaba (BABA.US)$Both declined.

According to previous reports, the annual interest rate for this convertible senior note is 0.25% to 0.75%, the term is seven years, and the first five years are non-redeemable. The terms show that these notes will have a conversion premium of 30% to 35%. Citigroup, J.P. Morgan Chase, Morgan Stanley, Barclays, and HSBC are assisting in arranging the deal.

Meanwhile, according to the announcement, Ali expects to grant initial purchasers of notes the right to purchase additional notes with a total principal amount of up to US$500 million, and can exercise the relevant options within 13 days from the date the notes are issued (including the day). As a result, the deal will raise up to $5 billion.

Ali said it plans to use the net capital raised from the issuance of the notes to: buy back a number of Alibaba American Depositary Shares according to the existing share repurchase plan while issuing and pricing the notes; fund further share repurchases from time to time based on the company's existing share repurchase plan; and fund the costs required to establish capped call transactions (capped call transactions).

Among them, it is worth noting that according to the announcement, the upper price of a bullish limit transaction is expected to be 100% higher than the final transaction price of American Depositary Shares on the day the note was issued and priced. Analysts believe this can be understood as Alibaba buying a call option that will increase its stock by about 100%. Generally speaking, a bullish price limit transaction is expected to reduce the potential dilution of shares when the notes are converted, and offset any cash payments that Ali should subsequently pay in excess of the principal amount of the converted notes.

Earlier, it was reported that Ali will issue this batch of convertible senior notes, mainly to fund stock repurchases and growth. It also indicates that Ali is currently in need of capital to invest in its core business and cloud business, and to increase its bet on artificial intelligence.

As for simultaneous repurchases, Ali is repurchasing the estimated initial hedging value of the entire transaction, which is expected to facilitate initial hedging for investors interested in hedging notes. The relevant price is the closing price of US stocks on the 23rd. Ali said that simultaneous repurchases and future repurchases carried out according to the share repurchase plan will be paid with funds raised from the issuance of notes or other cash. Overall, it is expected to offset the potential dilution of shares when the notes are converted.

Relevant news broke during the Hong Kong stock trading session. Ali Hong Kong stocks took the lead in a sharp drop. The decline extended to over 6.5%. The closing price was HK$78.65, closing down 5.24%. Alibaba's US stock closed down 2.27% to $80.8 on Thursday.

Earlier this week, JD also announced the issuance of 1.75 billion US dollars of convertible bonds. HSBC pointed out earlier that it is not surprising that internet companies use the bond market to enhance shareholder returns. In the current high interest rate environment, convertible bonds provide a better financing option compared to ordinary bonds.

HSBC said that historically, after Internet companies issued convertible bonds, stock prices often fell in the short term. Over the past three years, the stock price dropped an average of 8% on the first day after the announcement, and fell 23% on the 30th day. The bank also believes that Meituan, Tencent, NetEase, and Pinduoduo may follow suit. It is estimated that Meituan and Tencent are the companies most likely to issue convertible bonds.

Editor/Somer