Research: Rating Action: Moody’s assigns a Baa2 rating to USD notes offered by Lenovo

Hong Kong, July 18, 2022 — Moody’s Investors Service has assigned a Baa2 senior unsecured rating to the proposed bonds to be issued by Lenovo Group Limited (Baa2 stable).

The outlook is stable.

Lenovo will use the proceeds of the proposed issuance to refinance its existing debt and for working capital purposes and, in the case of the green bond tranche, to finance or refinance eligible projects in accordance with Lenovo’s green financing framework. .

RATINGS RATIONALE

“Lenovo’s proposed bond issuance will have a limited impact on the company’s credit profile as it will not materially impact its debt leverage and the company will use a portion of the proceeds to refinance its existing debt,” said Gerwin Ho of Moody’s. Vice President and Chief Loan Officer.

“The issuance will further improve Lenovo’s debt maturity profile and strengthen its financial flexibility,” Ho added.

Lenovo’s Baa2 issuer rating reflects the company’s long operating history and track record of organic and inorganic growth; leading position as a supplier of personal computers (PC); and a diversified geographic exposure in terms of revenue generation and operations.

On the other hand, the company’s rating is constrained by its low profitability due to competition and investments linked to its internal production capacity.

Moody’s expects Lenovo’s revenue over the next 12 to 18 months to be broadly flat from the $72 billion it made in the fiscal year ending March 31, 2022 ( FY2022). This revenue projection reflects growth in its smartphone, server, and solutions and services businesses, which will partially offset a slight decline in its PC business due to lower shipments in the overall PC market.

Moody’s expects global PC unit sales to decline by mid to high single digit percentages over the next 12 to 18 months following record growth in 2020 and 2021. The PC segment has benefited over the past Last 18 months of strong demand amid supply shortages. Despite these headwinds, Moody’s expects PC industry revenue and profitability to be above pre-pandemic levels over the next 12 to 18 months.

Moody’s expects Lenovo’s adjusted EBITDA margin to be stable at approximately 5.8% to 6.0% over the next 12 to 18 months, compared to 5.8% in fiscal 2022. This margin projection of EBITDA reflects an increased contribution from Lenovo’s higher-margin solutions and services business, as well as cost control that will mitigate increased competition in a declining PC market.

Moody’s expects Lenovo’s leverage, as measured by Adjusted Debt/EBITDA, to increase slightly to approximately 1.5x over the next 12-18 months from our previous expectation of 1.3x, reflecting a higher level of indebtedness to finance working capital and investments. Moody’s calculation of adjusted debt includes debt, including deferred and contingent consideration and put option liabilities.

Lenovo’s liquidity is excellent. Moody’s expects the company’s cash balance, including bank deposits, of $4.0 billion as of March 31, 2022 and projected operating cash flow over the next 12 months to be sufficient to to cover its short-term debt of $788 million, capital expenditures, the PCCW acquisition of Lenovo Technology Solutions and PCCW Network Services and dividend payments over the same period.

Lenovo’s issuer rating is unaffected by subordination to receivables at the operating company level, as the company’s highly diversified business profile – including its geographically diverse manufacturing facilities around the world – mitigates the risk of structural subordination.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

The stable rating outlook reflects Moody’s expectation that Lenovo will increase the scale and scope of its revenues while maintaining its profitability, leadership position in the PC market, and prudent approach to capital expenditures and investments.

Upgrade pressure could arise if Lenovo maintains PC market share and increases revenue and profitability; maintains its strong liquidity and generates a solidly positive free cash flow; and strengthens its credit profile, with a debt/adjusted EBITDA ratio below 1.0x on a sustainable basis.

Moody’s could downgrade Lenovo’s rating if the company’s position in the PC market weakens as its profitability declines significantly; the company is adopting an aggressive debt-financed investment strategy that is deteriorating its credit metrics, with adjusted debt/EBITDA above 2.0x-2.2x; or its liquidity weakens, all in a lasting way.

The main methodology used in these ratings is Diversified Technology published in February 2022 and available at https://ratings.moodys.com/api/rmc-documents/379525. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Lenovo Group Limited designs, manufactures and sells personal computers, smart devices, smartphones and servers. The company generated $72 billion in revenue in the fiscal year ended March 31, 2022, operating in more than 180 markets globally with a team of approximately 75,000 employees. It was listed on the Hong Kong Stock Exchange in 1994.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to participate when they have an overall relationship with Moody’s. Unless otherwise specified in the Regulatory Disclosures as a non-participating entity, the rated entity is a participant and the rated entity or its agent(s) generally provide information to Moody’s for the purposes of its rating process. Please refer to https://ratings.moodys.com for regulatory information for each credit rating action, displayed on the issuer/deal page, and for Moody’s policy on naming nonparticipating rated entities, displayed on https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

The first name below is the primary rating analyst for this credit rating and the last name below is the person primarily responsible for approving this credit rating.

Gerwin Ho
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queens Road
Hongkong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate General Manager
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Release Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queens Road
Hongkong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

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