Second bond in three years
Alibaba’s (BABA) decision to float its $7.0 billion bond sale in November may have been a well-timed move designed to limit its costs associated with borrowing. Alibaba’s $7.0 billion bond sale was its second in three years after it last sold $8.0 billion in bonds in 2014.
Borrowing before the cost of borrowing increased
Alibaba (BABA) sold its latest round of bonds just before the Federal Reserve was expected to raise its benchmark short-term interest rate. In December 2017, the Fed hiked the benchmark rate by 0.25%.
When interest rates go up, the cost of borrowing also rises. By floating its bonds in November, Alibaba escaped potential adverse impacts stemming from the Federal Reserve’s interest rate hike. Although the Fed noted that it plans to raise interest rates at least three times in 2018, some on Wall Street believe there could be more than three rate hikes this year.
Investing in delivery networks
Alibaba (BABA) is expected to spend its latest bond cash on investments and acquisitions geared toward expanding its logistics networks. This network enhancement is intended to speed up delivery of e-commerce orders, as competition heats up with JD.com (JD) in China (MCHI) and Amazon (AMZN) overseas.
Alibaba derives most of its revenues from e-commerce operations, and China is its largest market. Its retail sales in China increased 72.0% year-over-year in its fiscal 2Q18 (September quarter), which led to overall sales jumping 61.0% year-over-year to $8.3 billion.