Alibaba revises Alipay pact before US IPO

Alibaba has revised an agreement with the parent of online payments affiliate Alipay, greatly reducing the e-commerce giant's exposure to loan risks and financial services regulations before its initial public offering in the United States.

In a regulatory filing in the US on Tuesday, Alibaba also said it had agreed to sell its highly successful small-enterprise loan operations to Alipay parent Small and Micro Financial Services for 3.22 billion yuan (HK$4.05 billion) in cash.

The Alipay parent, in exchange, will pay Alibaba annual fees from 2015-2017 equal to 2.5 per cent on the average daily balance of the small-business loan portfolio, while fees from 2018-2021 will be based on the amount paid in 2017.

"Bundling the sale of the small and medium-sized enterprise loan business with the amended agreement makes sense, because that lending set-up is widely recognised as a part of Alipay's overall operations on the mainland," said Ricky Lai, a research analyst at Guotai Junan International.

Alibaba, based in Hangzhou, Zhejiang province, said the reworked commercial agreement and divestment will provide the firm with a wider claim on pre-tax income from the Alipay parent's existing and future businesses.

The share of consolidated pre-tax income paid to Alibaba has been amended to 37.5 per cent, compared with 49.9 per cent under the 2011 agreement.

For regulatory reasons, Alibaba will retain about 3.244 billion yuan of the existing small-enterprise loan portfolio, which will be wound down over time as such loans are repaid.