Innovative mix of funding options
The challenge
With operations in more than 60 countries and products selling in 160 markets, increasingly the group needs cash to support long-term funding across the global markets. Owing to the pressure on margins in its PC business, free cash flow from operations has been affected, while other new age business as well as restructuring is causing cash outflow. This affects its debt and credit covenants.
As Keith Wong, Capital Market Operations recalls, “We embarked on a transformational journey to redefine the treasury priorities for creating a strong long-term funding platform for the group, with the right cost and balance sheet mix. One of our key objectives was to closely manage the debt and leverage, together with making funding available for the business to grow.”
Lenovo currently manages a debt book of around US$3-4bn and taps various market instruments to finance the group’s funding requirements.
Lenovo’s team is continuously looking for opportunities to refine the debt mix. Just this year, Lenovo has tapped the capital markets for US$500m of long-term senior debt and US$1bn of perpetual debt securities.
The solution
There are two key components as follows:
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Innovative debt management tools
In a phased and planned manner, the company is restructuring its capital mix. Starting two years ago, Lenovo raised the then largest unrated REG-S bond in Asia with a US$1.5bn offering which opened up the unrated bond market in Asia and soon after resulted in several other Chinese and Asian issuers starting to issue inaugural unrated REG-S bonds. While the CNH market was still relatively quiet, Lenovo issued a CNH4bn bond after a slow period for offshore yuan debt, and was credited for “waking up Hong Kong’s sleepy dim-sum bond market with that year’s largest sale of offshore yuan debt” by the Wall Street Journal and many other market observers. Lenovo’s CNH4bn bond also allowed the company to create a natural hedge against its recurring incoming yuan receipts, thus reducing its overall hedging costs.
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Reshaping the capital mix
In 2017, Lenovo issued a US$1bn subordinated perpetual non-call five year option, resulting in equity treatment for this perpetual from both an accounting and loan covenant perspective. This subordinated perpetual was especially structured to suit Lenovo’s needs by allowing the company to raise funding from high quality and long-term investors, while obtaining equity treatment for this issuance and help with leverage. In parallel, they issued US$500m of US fixed rate bonds (senior debt) for five years.
Best practice and innovation
Lenovo’s team has set a high benchmark in funding over the years through:
- Keen understanding of the capital markets.
- Close engagement with investors.
- Speed and agility in tapping the market at the right time.
- Utilising a mix of funding options to meet the company’s needs.
The aforementioned characteristics of Lenovo’s treasury team have allowed the company to successfully close several benchmark bond offerings.
Wong concludes, “The diverse and innovative mix of funding solutions we utilise is a true testament to our expertise across all funding options, ranging from capital markets to trade financing. Moreover, we have been able to use our funding solutions to bring about other treasury-related objectives, including reducing hedging costs, getting off balance sheet treatment and equity treatment for certain debt instruments.”
Key benefits
- Improvising on the capital structure/debt mix by issuing US$1.5bn bonds during 2017. This refinancing has allowed the company equity treatment and supporting deleveraging.
- Building a long-term stable platform for funding the group’s operations at the most effective cost.
