The challenge

Since 2005, Lenovo has been financing its distributor receivables portfolio through IBM Global Financing (IGF), a captive financing subsidiary of International Business Machines Corp (IBM). The IGF financing platform handles credit underwriting, dispute resolution and collection services, with approximately 400 people.

Lenovo was notified in October 2018 that IGF had decided to exit the third-party receivables financing business, which would eventually result in a US$3.5bn working capital gap for Lenovo.

With the imminent wind down of IGF financing, and with Lenovo’s continuous growth ambitions, it became apparent that the Lenovo treasury team were to be tasked with the almost impossible – to find a solution that would replace the US$3.5bn working capital gap across 31 countries globally and in 14 currencies, within the span of four months.

The solution

In January 2019, Citi and BNP Paribas were mandated as joint lead arrangers on a US$3bn replacement financing for Lenovo, which was eventually structured in the form of a trade receivables securitisation (the ‘Transaction’), covering 30% of Lenovo’s total sales.

The purpose of this Transaction was to not only support Lenovo’s wider funding objectives, but to support and reinvigorate the primary distributors of the technology industry across PC sales (89%), data centre and services (10%) and smartphones (1%). This programme only covers the freely convertible currencies.

The Transaction is a revolving true sale of trade account receivables originated by Lenovo’s subsidiaries to a bankruptcy remote SPV established for this facility. The collateral for the Transaction is made up of short-term trade account receivables (up to 120 days), denominated in more than 14 currencies, with a razor hedging strategy to accommodate funding currencies of only USD and EUR.

With Asian markets being very volatile, and with a refinance on the horizon, Lenovo was looking to tap the market with the right instrument and coupon rate for about US$700m of financing.

Lenovo also successfully completed a US$675m convertible bond in January 2019, which was the largest TMT sector convertible bond in Asia ex-Japan over the last eight years, and the largest USD denominated convertible bond in Asia ex-Japan in the last three years.

The convertible bond showed Lenovo’s ability to understand complex funding products and the market, allowing it to successfully time its launch and execution, to get the best results.

Best practice and innovation

The trade securitisation programme provides Lenovo with the flexibility to grow the programme through adding additional jurisdictions, assets and additional financing partners, if necessary.

It also allows Lenovo to sell 100% of the credit risk, first loss piece to third-party investors, and achieves legal true sale international financial reporting standards (IFRS) accounting balance sheet de-recognition for all of Lenovo’s subsidiaries selling receivables into the programme.

The diverse and innovative mix of funding solutions by Lenovo is a true testament to the company’s expertise across all funding options, especially convertible bonds. Lenovo’s team has set a high benchmark in funding, and consistently demonstrates a keen understanding of the capital markets and close engagement with investors.

Key benefits

• US$3bn securitisation achieved IFRS accounting balance sheet de-recognition for Lenovo and working capital benefit for the equivalent amount.
• True sale obtained for 22 jurisdictions against 31 countries.
• FX hedging strategy to match fund USD and EUR, with a further 12-plus currencies.
• Disciplined book-building with 35 global investors, bidding across the whole capital structure to achieve an average of 250% oversubscription.
• The transaction was executed under a tight timeline, with the syndication closing within two months and across all classes.
• Diversified Lenovo’s existing debt profile and investor base.
• Achieved significant interest savings relative to a comparable straight bond financing (US$20m savings per annum).
• Conversion price above the highest levels reached in the last three years.
• Book covered in less than one hour.