Why Alibaba Stock Was Riding Higher on Wednesday

Key Points

• The company pulled off a successful round of capital raising.

• It was aiming to drum up a gross amount of $3.2 billion in funds.

• 10 stocks we like better than Alibaba Group ›

Chinese e-commerce giant Alibaba Group (NYSE: BABA) was standing tall on the stock market Wednesday. Fueled by a successful round of capital-raising, the company's U.S.-traded American depositary shares (ADSes) were rising by nearly 3% in late-session action. That was easily outpacing the S&P 500 index's gain of 0.2% at that point.

Billions of dollars in fresh capital

Alibaba announced that it has completed a roughly $3.2 billion flotation of zero coupon convertible senior notes. The purchasers were "certain non-U.S. persons," it did not identify.

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These securities can be converted into ADSes at an initial rate of nearly 5.18 per every $1,000 in principal amount of the notes. The notes mature in 2032 if not converted. Alibaba stressed that the conversion rate is subject to adjustment, under certain conditions.

At the initial rate, Alibaba wrote, the conversion price would be $193.15 per ADS. That's a more than 31% premium to the price of the company's Hong Kong-listed ordinary shares.

The company said it will use the amount it nets from the sales of the notes for "general corporate purposes." The two specific uses it mentioned were a bolstering of its cloud infrastructure and international operations.

Dilution? What dilution?

Investors liked the idea of Alibaba raising capital in this way because the note issue won't end up being too dilutive to existing shareholders, or present a huge additional burden to the balance sheet. The market cap of the ADSes currently tips the sales at almost $397 billion, while at the end of its latest-reported quarter its debt pile stood at 227 billion Hong Kong dollars ($32 billion).

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.