Li & Fung, the world's biggest supplier of clothes and toys to retailers, saw its credit rating outlook downgraded after announcing plans to offer US dollar-denominated perpetual bonds to fund overseas acquisitions. Despite the plans to take on more debt, the stock rose nearly 1 per cent yesterday as investors bet the supplier would be able to use the acquisitions to boost its declining core earnings. Li & Fung said in a filing to the Hong Kong stock exchange yesterday that it intended to issue the bonds to professional and institutional investors mainly for business development and acquisitions. The company said the sizing and pricing of the bonds would be finalised after a book-building process. Bloomberg quoted a source as saying the company might offer as much as US$500 million of notes at a yield of about 6.25 per cent. The securities would be listed on the Singapore stock exchange. Standard & Poor's Rating Services lowered the rating outlook on Li & Fung to "negative" from "stable" yesterday, saying operating conditions in Europe and the United States, which generate 80 per cent of the company's turnover, remained challenging. "We believe Li & Fung may need additional funding to support accelerated acquisitions to try to meet its three-year target," Standard & Poor's said. Li & Fung's share price rose 0.92 per cent to close at HK$13.12 yesterday, compared to a 0.83 increase in the Hang Seng Index. "It's a usual practice adopted by Li & Fung to use its own money to acquire small companies and raise funds from the capital market when doing big acquisition projects," Credit Suisse analyst Gabriel Chan said. "The investors are positive for the move as they believe the acquisitions can help raise the company's earnings." In addition, he said, demand from the US was expected to see a short-term rebound after Hurricane Sandy caused widespread damage and huge losses in the country this week. Moody's has affirmed Li & Fung's rating outlook of "stable", and gave a (P)Baa2 rating for the securities it proposed to issue. "Li & Fung's debt leverage will increase moderately but will still be manageable given its capital-light business model," said Franco Leung, a Moody's assistant vice-president and analyst.