Lenovo issued its maiden $1.5 billion five-year bond on Tuesday – the largest unrated fixed-income instrument in Asia – in order to fulfill its acquisition binge.
In the company’s filing with the Hong Kong Stock Exchange on Tuesday, Lenovo chairman and chief executive Yang Yuanqing said net proceeds from the bond issue would be used for general corporate purposes, including working capital and to fund any acquisition activities.
The bond sale comes as Lenovo is working on completing two deals and so it could help address worries about the company’s capital base. In late January, the firm said it would spend $2.9 billion to buy Google’s Motorola handset business after saying it would acquire IBM’s low end server unit for $2.3 billion earlier that month.
“Lenovo needs the money and they raised this bond to cover the acquisitions although they have cash on balance sheet,” said a Hong Kong-based equity analyst. “From shareholders’ perspective this is viewed as a positive as it increases Lenovo’s flexibility in terms of tapping alternative funding sources.”
Equity analysts expect the two acquisitions, part of Lenovo’s efforts to diversify beyond PCs, to be completed in December this year.
Last June, Lenovo conducted roadshows in Hong Kong, Singapore and London, prompting expectations that it would soon tap the market for its first dollar-denominated issue. However, the summer months of 2013 were primarily a victim of ongoing US Federal Reserve talk of a potential tapering, which caused Asia debt markets to shut down, triggering Lenovo to postpone its bond deal.
Large investor demand
As a result of its ambition to expand its business operations, high-quality investors scrambled for Lenovo’s paper, which is also the largest ever single tranche senior Reg S-only bond offering in the Asian tech sector, according to Dealogic data.
The transaction, which has a yield of 4.741%, received an order book of more than $8 billion from more than 400 accounts, according to sources close to the deal. Such strong demand enabled the deal to be priced 20bp tighter from initial price estimates of Treasuries plus 320bp area.
Asian investors subscribed to 83% of Lenovo’s paper, while 14% went to European investors and the rest went to US investors. Public institutions bought 47% of the notes, asset managers 35%, financial institutions 6%, private banks 6%, insurers 4% and pension funds 2%, according to a term sheet.
Comparables
Some of Lenovo’s closest comparables include A3/A+ rated Tencent bonds expiring in 2019 and A- rated Baidu notes expiring 2018 that were trading at a G-spread of 162bp and 147bp respectively, according to bankers familiar with the deal. Other comparables include B1/B+/B+ rated Dell bonds maturing in 2019 that were trading at a G-spread of 326bp.
Lenovo’s issuance joins the flood of other dollar-denominated bonds that has surfaced in recent weeks, as borrowers sought to make use of the still-low interest rate environment. This caused April dollar DCM volumes to swell to a record-breaking $34.5 billion with 40 deals in Asia ex-Japan, according to Dealogic. Year-to-date volumes also touched a record high of $75.7 billion with 128 transactions in the region.
Currently hovering around the 2.7% level, the 10-year US Treasury yield has been trading within a narrow band of 20bp – between 2.6% and 2.8% - since January, according to Bloomberg. The yield has risen from 1.81% a year ago, though it is still less than the average during the past decade of 3.46%.
Citi was the sole global coordinator and joint bookrunner of Lenovo’s deal. Other bookrunners include ANZ, Bank of China, Barclays, Bank of America Merrill Lynch, BNP Paribas, Credit Suisse, DBS Bank, Mitsubishi UFJ Securities, Mizuho Securities, Royal Bank of Scotland and Standard Chartered.
