Rating Action: Moody's assigns A3 to Baidu's proposed senior notes
Global Credit Research - 17 Aug 2021
Hong Kong, August 17, 2021 -- Moody's Investors Service has assigned an A3 senior unsecured rating to the proposed USD notes to be issued by Baidu Inc. (A3 stable).
Baidu will use the proceeds to refinance its existing debt and for general corporate purposes. An equivalent amount of the net proceeds from the Sustainability Bonds will be used to finance or refinance the company's Eligible Projects, pursuant to its Sustainable Finance Framework.
RATINGS RATIONALE
"Baidu's proposed senior unsecured notes will improve its debt maturity profile and expand its capacity to accommodate any funding needs over the next 12-18 months," says Lina Choi, a Moody's Senior Vice President.
"The proposed notes will only have a moderate impact on Baidu's debt leverage, as the company's earnings growth in the coming 6-12 months should offset the increase in debt," adds Choi.
Baidu's A3 issuer and senior unsecured ratings continue to reflect the company's position as the leading Chinese-language internet search engine and one of the largest providers of online advertising services in China. The rating also takes into consideration Baidu's steady free cash flow, disciplined acquisitions and demonstrated ability to recover from temporary business challenges.
At the same time, Baidu's rating is constrained by China's competitive internet market, increasing acquisition risks related to the company's efforts to build an artificial intelligence (AI) powered platform, and potential reputational risks associated with its deconsolidated financial service business, Du Xiaoman Financial.
Moody's expects Baidu's revenue to grow around 15%-18% in 2021 from the RMB107 billion it reported for the 12 months ended December 2020. Moody's also expects the company to maintain EBITDA margins of around 30%. As such, Moody's expects Baidu's adjusted debt/EBITDA will stay around 2.5x in the next 12-18 months, which is appropriate for its A3 ratings.
Baidu's liquidity is excellent. The company reported a solid net cash position. It had around RMB169 billion ($26.2 billion) in cash, cash equivalents and short-term investments as of 30 June 2021.
But the company's investment needs remain high, including for AI-related new businesses, digital content creation and potential acquisitions. In view of its ongoing investment needs and regulatory requirements, Moody's still expects Baidu to maintain a solid net cash position over the next 12-18 months, along with a prudent approach to investments and acquisitions. These factors will provide it with a buffer against potential uncertainties.
Moody's has also considered the following environmental, social and governance (ESG) considerations.
In terms of social factors, Baidu transmits and stores confidential data and other types of sensitive records to provide security-critical services, exposing it to legal, regulatory or reputational risks in the event of a cybersecurity breach. However, Baidu has yet to experience any major compliance and regulatory violations in its data handling framework, supported by its robust security system.
In terms of governance considerations, Moody's has taken into account the high concentration of voting power in the company's key shareholder. However, this risk is mitigated by (1) a balanced board composition, featuring mostly independent non-executive directors, and the fact that its audit committee is entirely comprised of independent directors; and (2) the company's long track record as a listed entity with a prudent financial policy and a solid net cash position, backed by stable cash flow generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Baidu will maintain metrics consistent with its A3 rating, including strong credit quality through the business cycles, excellent liquidity, prudent financial policies and a solid net cash position.
Moody's could upgrade Baidu's ratings if (1) the company maintains a strong financial profile while growing its core search business by monetizing new product initiatives; (2) it remains prudent in its investments and new AI-related business initiatives; (3) it demonstrates a balanced use of funding channels as it expands its business scale and scope while maintaining a strong financial profile; and (4) Du Xiaoman does not require additional funding from its shareholders, including Baidu.
Financial metrics indicative of an upgrade include adjusted debt/EBITDA, including adjustments for loss provisions at Du Xiaoman, declining to 2.0x or lower on a sustained basis.
Baidu's rating could be downgraded if the company fails to maintain steady EBITDA because of a deterioration in its market position and a subsequent decline in its market share, which, in turn, affects its revenue growth or cash flow generation; engages in aggressive investments or acquisitions that strain its balance-sheet liquidity or increase its overall risk profile; or experiences financial stress at or capital calls from Du Xiaoman.
Financial metrics indicative of a downgrade include adjusted debt/EBITDA rising above 2.5x-2.8x or a net debt position, both on a sustained basis. Moody's will also monitor for any sustained deterioration in the company's retained cash flow/debt, which has remained at 15%-35% since 2015.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at moodys.com. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Established in 2000 and listed on the NASDAQ in 2005, Baidu Inc. (Baidu) is a leading company in China's internet search market. It has a combined personal computer (PC) and mobile traffic share of more than 70% in the Chinese online search market. Baidu also offers Artificial Intelligence (AI)-enabled products and services with an infrastructure consists of AI chips, deep learning framework and core AI capabilities, as well as an open AI platform to facilitate wide application and use.
m.moodys.com
|
|
