Lenovo made its debut in Asia’s equity-linked market on Tuesday as the Chinese technology giant raised $675 million from a convertible bond issue to repay a massive US dollar debt due in four months.
The world’s largest personal computer maker tapped the hybrid security at a time when its gearing ratio hit its highest level since it went public in 1999. Its net debt-to-equity ratio reached 43% as of the end of March last year, up significantly from 4% a year earlier.
Through the years Lenovo has never raised any equity because the company was in a net cash position every year until the 2014/15 financial year. That was a landmark year in the company’s history as it bought Motorola Mobility from Google for $2.9 billion and purchased IBM’s x86 server business for $2.1 billion.
The company resorted to an equity-linked issuance as it is due to repay an outstanding $1.5 billion senior note in May this year which could potentially deplete the bulk of its $1.86 billion cash holdings.
Tuesday’s Reg S trade saw Lenovo add $675 million to its coffer with a five-year, two-year put convertible note that was deemed fairly priced.
The unrated group settled its debut convertible bond issue at the investor-friendly end of the 2.875% to 3.375% initial coupon range and the 40% to 45% conversion premium range over its HK$5.71 ($0.73) Tuesday close. In the end, the new issue priced at a HK$7.99 strike price with full dividend protection.
Pricing came in line with Lenovo’s outstanding $500 million senior note due March 2022. The 3.875% three-year paper was trading at a G-spread of 349 basis points, which was slightly wider than the 330bp credit assumption given by the bookrunners of the convertible bond on Tuesday night.
Bond traders said the 19bp premium effectively reflects the one-year maturity extension for the straight bond over the two-year put option with the newly issued convertible bond.
Bankers reported that the trade was multiple-times oversubscribed at final pricing, which allowed the bookrunners fully to exercise the $125 million greenshoe option on top of the $550 million base deal.
Apart from the fair pricing, the deal also got traction with its decent size, the issuer’s blue-chip status and the stock’s high volatility on a one-year basis, according to a source familiar with the situation.
Based on the 330bp credit assumption, a 5% stock slippage and a borrow cost at general collateral level, Lenovo’s new bond was issued with a bond floor of 95% and an implied volatility of 21% at the final price.
In the secondary market, the new 2024 CB was trading at around 101.6 to 101.8 early Wednesday afternoon, according to bond traders.
Lenovo’s new deal is the second convertible bond issue in Asia ex-Japan this year after Yuhua Education’s $120 million issue last week.
Citigroup, Morgan Stanley, BNP Paribas, DBS and CLSA were joint bookrunners on Lenovo’s new issue.
