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Just Like Jack Ma, China’s AAA Curve Vanishes

Just Like Jack Ma, China’s AAA Curve Vanishes

Sunday, 17 January, 2021 - 06:00

Just over three years ago, e-commerce giant Alibaba Group Holding Ltd. tapped corporate bond markets for $7 billion. The company offered investors up to 40-year debt, creating a benchmark for high-quality Chinese companies. Investors gobbled it up.


How times have changed. Alibaba has gone silent on the potential debt sale of as much as $8 billion that was expected this week, Bloomberg News reported Thursday. Prospective investors haven’t received a marketing memorandum yet — plans only emerged earlier this month — as the company and its affiliate Ant Group Co. deal with regulatory scrutiny, including alleged monopolistic practices. Chances are they don’t want the prospectus on display with fresh language on regulatory risks and other factors. Meanwhile, billionaire founder Jack Ma hasn’t been seen in public since Ant’s $35 billion initial public offering was scrapped in November.


In addition to regulatory hurdles at home, Alibaba, along with fellow tech giant Tencent Holdings Ltd., faced the threat of an American investment ban. Although US officials deliberated, the Treasury Department blocked a Pentagon and State Department effort to add the firms to a list of companies considered to be linked to China’s military, lifting the additional looming risk. Search leader Baidu Inc. also escaped.


The 2017 debt sale was a high point for credit markets. Alibaba, close to the top of the quality scale, issued multi-tranche debt maturing at 5 1/2, 10, 20, 30 and 40 years, with the longest end yielding 1.58 percentage points over government debt at the time of issuance. By doing so, Ma’s baby had effectively created and extended a full, high-quality, corporate bond curve for Chinese companies. It was compared to tech behemoths in developed markets.


Every country needs a benchmark. In China, Alibaba could have been that. In the 1950s and 60s, when government bond markets weren’t as developed and deep as now, US dollar bond investors relied on debt of top-rated companies like American Telephone and Telegraph Co. (now AT&T Inc.) to gauge future rate expectations. It wasn’t a promise that they would never default; however, they were considered stable and financially solid, much as Alibaba is today.


Such bonds help market efficiency. When a new issuer comes to market, investors look for comparisons to determine the right pricing. The presence of a blue chip like Alibaba makes that easier — the most liquid bonds aid in price discovery. In China, there isn’t much of this. Rating scales don't quite give investors a full sense of risk, with a changing regulatory landscape and hard-to-determine sovereign support. State backing or implicit guarantees used to give some confidence, but there’s now a big question mark as defaults rise. It’s hard to tell which government-owned enterprise is in Beijing’s favor and which isn’t.


Investors often turn to the likes of State Grid Corp. of China, which operates power lines for most of the country and is an active issuer with the same rating 1 as Alibaba. But it doesn't fully capture the reality of non-financial Chinese corporates. China won’t be turning the lights off any time soon. The finance ministry has tried to create a full curve for investment grade benchmark bonds in recent years by issuing US dollar debt. For now, the Alibaba anchor is all but gone.


Regulators have cast a pall over a potential corporate benchmark with the ructions at Alibaba and Ant. When it comes to investment grade, consistency matters. The uncertainty is going to be hard to quantify and no premium can fully capture it. Regardless of the countless risk factors laid out in the bond offering document in 2017, this shadow will hang over the market’s eventual maturity. Beijing has sent a message that no matter how high quality a company, hard-earned standing can be pulled from under its feet.


The takeaway: There are no real AAA ratings in China for now. Just like Jack Ma, today you’re in, tomorrow you’re out.


Bloomberg


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