HONG KONG, April 24 (IFR) - Unrated Lenovo Group returned to the Reg S-only dollar bond market the week before last after a two-year absence and was able to upsize the deal on strong demand despite a still relatively sluggish primary market.
The US$650m of five-year senior notes were priced at par to yield 5.875% on April 17, equal to 555bp over Treasuries and inside initial guidance of 6.125% area.
The deal drew a final order book of more than US$2bn, including US$260m from the leads. This allowed the issuer to exceed its initial size target of US$300m–$500m, according to a banker on the deal.
Lenovo still has a US$350m offshore debt issuance quota following the transaction.
Another banker on the deal said the offering was the biggest Reg S public deal from an unrated issuer since New World Development's US$950m of 4.125% 10-year bonds last July.
However, with a Reg S market still volatile and in recovery mode, Lenovo had to pay up like other recent issuers.
Lenovo last tapped the international bond market in March 2018 with a US$750m 4.75% five-year bond issue priced at Treasuries plus 215bp.
"It's hard to say exactly how much new issue premium it has paid as its existing bonds are illiquid and quotes for its 2023s were all over the place, from a G-spread of 300bp to 400bp–500bp, or even 600bp," said the second banker.
"Lenovo is not a frequent issuer and given its unrated nature and the low price transparency of its secondary curve, investors needed more time to do the credit analysis, and feedback also came within a wide range, from 5% to 7%," he said.
Final pricing was within fair value estimates of 5.5%–6.0%, according to Nomura, but was wider than Deutsche Bank's views of 5.3%–5.4%.
Nomura views Lenovo as a BB+/BB credit and compared it with stronger sector peers such as AAC Technologies and Huawei, as well as BB+/BB names such as Yanzhou Coal and Country Garden. Deutsche Bank compared it with Huawei along with weak BBB/strong BB names such as Shimao Property and GLP China.
The newly issued bonds traded up more than one point to 101.05–101.2 early on April 17 but lost some of the gains after some profit-taking. They were quoted at 100.45–100.75 in late morning that day.
Both bankers, however, said Lenovo's successful deal does not necessary signal the reopening of the Reg S market for unrated issuers, or even high-yield issuers.
"The market is still volatile and there's increasing credit differentiation. Investors will only park their money on good names. High-quality unrated names such as Lenovo are rare," the first banker said.
The second banker said that despite the recent recovery, pricing levels for high-yield are still demanding and he expects there will be no quick return of high-yield deals.
"The Reg S market for Chinese issuers just reopened last week and public deals from high-yield issuers may need a few weeks to happen," he said.
Asia-Pacific investors took 74% of Lenovo's new bonds and EMEA buyers 26%.
The Chinese personal computer and handheld device maker plans to use the proceeds for refinancing and general corporate purposes.
"In our view, the successful pricing displays the company's strong access to the capital market, although the borrowing cost is slightly higher than in recent times," Trung Nguyen, senior credit analyst at Lucror Analytics, wrote in a note.
Lucror Analytics' fundamental credit bias on Lenovo is "stable", in view of the company's robust fundamentals, and as the research firm expects the impact of Covid-19 on it to be limited.