Alibaba windfall prompts Hong Kong regulators to allow bond-funded buybacks
Leveraged $5bn bet with option protection prompts interest from regulators on how other companies can follow suit
Hong Kong regulators have begun allowing companies to avoid stringent rules on bond issuances and share buybacks, following the success of a $5bn transaction launched by Alibaba last year.
China’s largest technology company borrowed $5bn at near-zero rates in May 2024 through an issuance of debt that can be turned into equity, in the biggest ever convertible bond deal in the Asia-Pacific region.
It then used the proceeds to buy back its New York-listed shares — which had fallen by about 75 per cent from their late 2020 peak — in the following weeks. Since then the shares have recovered from roughly $80 to about $147 — a more than 80 per cent gain — helped by a broader rally in Chinese stocks and the rapid emergence of AI company DeepSeek, which has fuelled global investor interest in China’s tech sector.
Investors and bankers have hailed Alibaba’s well timed bet. Its success appears to be a driving force behind Hong Kong regulators’ decision to issue exemptions to rules preventing companies conducting concurrent buybacks and using a particular structure of derivatives to protect themselves.
“The exchange has taken the lessons from the Alibaba convertible deal and gotten comfortable with them . . . and they’ve come to the conclusion that they will provide waivers subject to reviewing on a case-by-case basis against their existing regulations,” said one person familiar with the thinking of Hong Kong’s financial regulators.
“This is certainly one of the reasons why we’ve seen increased activity in the Asian convertible bond market.”
Alibaba executed the trade on its American depository shares before it upgraded its secondary Hong Kong listing to a so-called “dual primary” alongside New York. Having a dual primary listing when it put on the trade would have subjected the company to the HKEX and Hong Kong’s Securities and Futures Commission’s more stringent rules.
Two people familiar with the deal said they were asked to give evidence to financial authorities on the specifics of the structure and the clauses within securities law preventing a similar deal by a company with a primary listing in the territory. The aim was to offer locally listed companies the same opportunities that a primary US listing gave Alibaba, the people said.
In newsletters circulated by the HKEX in November last year and June this year, it invited locally listed companies to apply for exemptions allowing them to put on this trade, including share buybacks and option protection.
Alibaba on Thursday announced its latest convertible bond issuance of some $3.2bn alongside capped call options, which it said was in order to invest in its cloud infrastructure and international ecommerce capacities.
Chinese video platform Bilibili in May announced a $690mn convertible bond issuance that included a waiver to launch a concurrent share buyback. Chow Tai Fook Jewellery, controlled by Hong Kong’s influential Cheng family, gained approval for a concurrent buyback for a HK$8.8bn convertible issuance in June.
“Since 2024, the exchange, after receiving clearance from the SFC, has permitted specific listed issuers to carry out share repurchases or call spread transactions concurrently with the issuance of convertible bonds,” said the SFC.
“The SFC and the exchange demonstrated their willingness to permit novel transaction structures when there is sound commercial justification and adequate features to protect market integrity.”
With US interest rates staying higher for longer, Asian companies have been piling into convertible bonds to tap cheap financing or refinance debt raised during the zero rate era. Citi expects Asian issuance of convertible bonds outside mainland China to hit a record in 2025, citing Dealogic figures showing about $21bn had been raised by the end of August.
As well as offering a lower coupon, convertibles have the benefit of not immediately diluting a company’s equity. Alibaba’s bonds were issued with a 0.5 per cent coupon, compared with US interest rates at the time of 5.25-5.5 per cent and 10-year Treasury yields above 4.3 per cent.
In order to hedge itself against the risk that its shares quickly hit the conversion price and bondholders convert their debt into equity, Alibaba spent $637.5mn of the money it raised on an options strategy known as a capped call, a common hedge used by convertible bond issuers.
This hedge gave it a call option — the right to buy shares — at a price of $105, which was around the conversion price for the convertible bonds. However, the benefit of this option was capped at a strike price of $161.60, which helped limit the cost of the strategy.
The overall effect was that when the price of the New York-listed shares rose above $105, instead of the company having to issue new shares to holders of the convertible bonds who chose to convert, it could instead use profits it made from the call options to meet demand. This meant the level at which the company had to issue new shares rose from a 30 per cent premium to the share price at the time of issuance, according to Alibaba’s filings, to a 100 per cent premium.
“Alibaba is an astute user of the capital markets — this was [Alibaba chair] Joe Tsai’s brainchild,” said one banker involved in the transaction.
“The whole thesis was that their share price was very low . . . the question was ‘how do we buy back a large amount quickly?’” the banker added.
If the company were to sell the shares it bought now — minus adviser fees, coupons and the net cost of the capped calls — the profit would be about $3bn, according to Financial Times calculations. In accounting terms, Alibaba’s gain on repurchasing shares does not show up in the firm’s profits but instead increases earnings per share.
“The deal was very favourable and shrewd for Alibaba,” said Sid Choraria, a portfolio manager at SC Marwar who owns shares in the company. “With today’s price, that repurchase has already created substantial value per share for continuing shareholders.”
However, if Alibaba’s share price rises above $161.60 by 2031, then the firm will no longer be able to meet demand from converting noteholders by using its call options and will have to dilute its own equity, which will reduce the gain from the trade.
The deal, run by banks including JPMorgan, Citi and Morgan Stanley, has also helped Alibaba towards its target of $35bn of share buybacks by 2027.
Alibaba and HKEX declined to comment.