In January 2014, Lenovo announced two ambitious cross-border acquisitions within a span of six days. The M&A transactions included the US$2.3 billion purchase of IBM’s server business on January 23, followed six days later by the announcement of Lenovo’s plan to acquire the Motorola Mobility smartphone business from Google for about US$2.9 billion.

Consensus among its relationship banks was that if Lenovo so wanted, it could fund these acquisitions via the bond market rather than using available credit facilities provided by its banks.

There were several considerations to make before deciding to tap the bond market, says company group treasurer Damian Glendinning. The first and obvious factor was the future direction of the interest rates.

“In the current environment, where the general consensus is that interest rates will go up rather than down, issuing bonds would typically be cheaper as bank rates tend to be floating rates, whereas bonds, in general, are fixed rates,” he says.

Another important point was to ensure that the firm’s relationship banks did not reach the maximum capacity of the credit appetite they have for Lenovo. “Our relationship banks would have supported us had we chosen to do a bank funding, but that would have started to get closer to the capacity that these banks have for any individual credit. That would have involved significant syndication of the loans into the market. It is important for me that we maintain plenty of flexibility and headroom in our relationships with our banks.”

Also, it was crucial to establish Lenovo’s presence in the bond market. The conjecture of low interest rates and a favourable bond market with a high investor appetite meant that it was the right time to issue the bonds.

The company on April 29 2014 priced US$1.5 billion of unrated five-year senior notes at US treasuries plus 300bp for a yield 4.74%, which was 20bp tighter from the initial price guidance. The deal garnered a high quality order book of over 411 accounts with orders in excess of US$8 billion. The offering represents the largest ever unrated bond deal out of Asia, and it was also the largest ever single tranche Reg S only bond offering in the region at the time of pricing.

Owing to a strong order book, the bonds have performed exceptionally well in the aftermarket trading which, in hindsight, has led some in the market to question if the issuer left too much money on the table.
However, part of the reasons why the bonds have traded up is because the US treasuries have declined significantly since pricing. When the deal was priced, five-year treasuries were at 1.74% compared to about 1.4% in October 2014.

“Partly, timing was a little unfortunate,” says Glendinning. “ If we held on longer, we could have a lower treasury rate. But treasuries plus 300bp for US$1.5 billion for an unrated first time issuer – even for a rated issuer – is a good deal. The bonds were highly sought after in the market. If we were to come to the market, we would be able to reopen it at a substantially lower price.”

But considering that the company does not have a huge debt requirement, the chances are slim that Lenovo will be frequenting the bond market. And precisely because of this, it decided to go for the unrated route with its inaugural offering.

“A rating is not necessary if a company is not going to be a frequent bond issuer, which is why Lenovo did not think it needs to get itself rated for its debut bond,” reflects Glendinning. “Whether or not we will be a regular borrower will depend on what happens to the business going forward. As the business is currently structured, we should not be a regular issuer of bonds. We do not have a huge requirement for working capital and we tend not to have big investments in plants and machinery. However, we are in an industry that changes a lot, so you never know what tomorrow will bring.”

Lenovo first contemplated the bond issue in 2013 as negotiations for the M&A transactions were ongoing. While there was no immediate need for funding, there was a high chance the company may need the money to fund the impending transactions which led Lenovo to conduct roadshows in Hong Kong, Singapore and London in June 2013. But just as the roadshows took off, the US Federal Reserve announced its plans on QE tapering, which virtually closed off the bond market for the next three months. As a result, the company decided to postpone its plan.

“There is no doubt in my mind, if we had been four weeks earlier, we would have a highly successful issue. But timing was unfortunate and was dictated by the fact that we needed our board to approve the bond offering,” recalls Glendinning . “Given the fact that we did not really need the money at that time, we decided not to rush into a deal then,” he notes.