Lenovo, the world's largest personal computer maker, is raising $2 billion through a zero-coupon convertible bond offering to a unit of Saudi Arabia's sovereign wealth fund, coming shortly after e-commerce giants Alibaba and JD.com issued similar bonds seeking to lower fund-raising costs.
The three-year bond will not bear interest, but investor Alat, a subsidiary of Saudi Arabia's Public Investment Fund, has the option to convert its stake into shares at maturity at an initial conversion price of HK$10.42 per share. That's a discount of about 12% from Tuesday's closing price, and if it converts all of its shares, it will release an additional 1.5 billion shares into the market, representing about 12.09% of the capital base as of the announcement date.
Arato plans to enter into a strategic partnership with a Chinese laptop maker to expand its presence and drive growth in the Middle East and African markets, according to a stock market filing.
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Lenovo said the net proceeds will be used to repay debt and for general corporate and working capital purposes. The company also announced plans to establish a regional headquarters and a new manufacturing facility in Saudi Arabia.
Lenovo Group's concept ThinkBook laptop with a transparent display was unveiled at a press conference in Hong Kong, China, Thursday, May 23, 2024. Photo: Bloomberg alt=Lenovo Group's concept ThinkBook laptop with a transparent display was unveiled at a press conference in Hong Kong, China, Thursday, May 23, 2024. Photo: Bloomberg>
“We expect to have increased financial flexibility to execute on our proven strategy and further drive our global transformation into a solutions and services-led business,” Lenovo said.
Lenovo's bond plans came days after Alibaba's record $4.5 billion bond offering and JD.com's $2 billion bond offering, both of which were issued to fund share buybacks, and UBS said other overseas-listed Chinese companies could follow suit.
“Issuing convertible bonds is an attractive financing plan for companies, allowing them to raise capital at a relatively low cost,” Sarina Cheung, co-head of Asia ECM, said at a press conference on Tuesday, adding that it would be “no surprise” to see more deals happening in the coming days.
In a high-interest rate environment, capital costs have risen sharply, making convertible bonds more attractive to issuers than traditional debt. JD.com's five-year convertible bond and Alibaba's seven-year convertible bond have coupon rates of 0.25% and 0.5%, respectively, well above the 5.7% yield on five- to seven-year dollar bonds issued by Asian companies, according to the ICE Bank of America index.
For investors, convertible bonds can offer both protection and additional income: Because they have built-in equity exposure, they rise in value when the underlying stock prices rise, and bond floors set a minimum price that acts as a safety net during market downturns, according to Schroders.
The Lenovo-Alert partnership comes as China and Saudi Arabia continue to deepen their economic ties. The PIF has been an active investor in Chinese tech companies, recently increasing its stake in Alibaba by 11%.
Citi is the sole adviser to Lenovo on the bond sale. The company's shares fell 4 percent on Wednesday to HK$11.34 a share on concerns about earnings dilution.
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