Baidu’s proposed exchangeable bonds receive A3 rating from Moody’s

Investing.com -- Moody’s Ratings has assigned an A3 senior unsecured rating to the proposed exchangeable bonds that Baidu Inc (NASDAQ:BIDU). plans to issue. The rating agency believes that the issuance will extend Baidu’s debt maturity profile, provide financial flexibility and expand its capacity to address its funding needs over the medium term, according to Shawn Xiong, a Moody’s Ratings Vice President and Senior Analyst.

Xiong also expects Baidu to continue maintaining its prudent financial discipline and a solid credit profile, which will provide buffers against competition and its ongoing investment in artificial intelligence (AI).

The proposed exchangeable bonds are considered as 100% debt-like, as they will rank on par with Baidu’s existing senior unsecured notes. The bonds also offer a put option to investors before the maturity date. Baidu intends to use the net proceeds from the bond offering to repay certain existing debts, pay interest, and for general corporate purposes.

Baidu’s A3 issuer rating reflects the firm’s position as one of China’s leading AI companies and providers of online advertising services. The rating also takes into account the company’s steady free cash flow, disciplined acquisition strategy, and history of rebounding from temporary business challenges.

However, these strengths are counterbalanced by Baidu’s exposure to China’s competitive internet market and its ongoing investment requirement as it continues to expand its AI-powered platform.

Baidu’s revenue is expected to grow by 2%-3% per annum over the next 12-18 months, with the growth of its AI-enabled businesses partially offsetting the slower growth in core search revenue. The company’s adjusted EBITDA margin is forecasted to remain stable at around 30%-33% over the next 12-18 months, as the negative impact of its shifting revenue mix towards lower-margin segments is offset by cost optimization measures.

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Baidu’s leverage, as measured by adjusted debt/EBITDA, is expected to remain stable at below 2.0x in the next 12-18 months. The company improved its debt leverage to around 1.7x in 2024 from 1.9x in 2023.

As of the end of December 2024, Baidu had around RMB127 billion in cash, cash equivalents, and short-term investments, compared to RMB22.4 billion in debt maturing over the next 12 months. The company’s operating cash flow and cash-like resources are expected to adequately cover its planned capital spending and acquisitions.

Given the need for new investment, an upgrade in Baidu’s rating is unlikely in the medium term. However, upgrade pressure could emerge over time if the company establishes a longer track record of monetizing its new product initiatives and maintains a strong financial profile.

Conversely, the rating could face downward pressure if Baidu fails to maintain steady EBITDA due to a decline in market position, engages in aggressive investments or acquisitions that strain its liquidity, or experiences financial stress from its subsidiaries. Adjusted debt/EBITDA rising above 2.5x-3.0x or a net debt position on a sustained basis are financial metrics indicative of a possible downgrade.

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