Legend issues domestic bond in tough conditions

Conglomerate Legend Holdings raises $293 million through a seven-year renminbi-denominated bond, while a challenging market environment prompts the PBOC to cut rates again.
Chinese conglomerate Legend Holdings, the parent company of Hong Kong-listed computer manufacturer Lenovo, has sold Rmb2 billion ($293 million) worth of bonds with a seven-year maturity, says a source close to the deal. The issue, priced at par, has a coupon of 5.87%, which works out to 120bp over Shibor (or the Shanghai interbank offered rate). It is denominated in renminbi and targeted at local investors only.

The deal was launched on Monday (October 6) and by midday Tuesday was oversubscribed 16.5 times with Rmb32.9 billion worth of investorsÆ money pouring in û an impressive performance in a tough market environment. UBS acted as the sole bookrunner.

The source says a third of the investors were banks, 12% were securities houses and the rest were asset and fund managers. Legend intends to use the funds for corporate expansion.

The renminbi market is totally isolated from the international market and has not been affected by the credit freeze experienced by other Asian economies as a result of the global market turmoil. Hence it has generally been developing at a stable pace.

A DCM banker says China's bond market would remain stable in the short term on the grounds that macroeconomic figures are broadly in line with market expectations and capital supply remains stable.

The PeopleÆs Bank of China, the Chinese central bank, has made strenuous efforts to open the developing corporate bond market this year. It has initiated moves to help local companies gain access to funding and to help them deal with the slowdown in economic growth caused by the global credit crisis.

The PBOC relaxed credit quotas in August, increasing the amount each bank can lend to each other. Then in a surprising move it cut lending rates in September to further boost the liquidity. It followed this up early yesterday evening with another 27bp cut to its benchmark lending and deposit rates, a further easing in the reserve requirement ratio for banks by 50bp to 17%, and a removal of the 5% interest income tax.

The source says China's largely closed financial system has so far not been affected by the credit squeeze in the United States and Europe, but financial regulators are concerned about the worsening situation globally, which ultimately may affect ChinaÆs economy.

In a research note, economists at Goldman Sachs said China's latest interest rate cut was a positive step in light of "rising downside risks to domestic demand, especially in terms of the weakness in the real estate sector, and subsiding inflationary risks". The bank had earlier said it expects China to ease rates by 150bp-200bp by the end of 2009 due to weakening growth momentum, with most of the cuts likely to take place in the fourth quarter this year or the first half of 2009.
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