Dr. Peng Telecom & Media Group Downgraded To 'B' On Rising Refinancing Risk; Outlook Negative

  • We see rising refinancing risks regarding Dr. Peng's bond maturities in 2020, given the company's lack of a comprehensive refinancing plan and limited record of good banking relationships.
  • The Shanghai-listed telecommunication service provider's liquidity and leverage could worsen owing to investments to rapidly grow its Internet data center capacity.
  • On March 14, 2019, S&P Global Ratings lowered to 'B' from 'B+' its long-term issuer credit rating on Dr. Peng and the issue rating on the company's guaranteed senior unsecured debt.
  • The negative outlook reflects the pressure on Dr. Peng's liquidity over the next 12 months because of the company's significant offshore and domestic bond maturities.
HONG KONG (S&P Global Ratings) March 14, 2019--S&P Global Ratings today took 
the rating actions listed above. We lowered the rating to reflect Dr. Peng's 
rising refinancing risk related to its bond maturities in 2020. 

The company has about Chinese renminbi (RMB) 4.7 billion bond maturities in 
the first half of 2020. These include US$423 million offshore bonds due June 
2020 and two domestic puttable bonds totaling RMB2.0 billion with exercise 
dates in April 2020 and June 2020. Meanwhile, Dr. Peng's operating cash flows 
are likely to reduce due to the company's weakening fixed-line broadband 
business and expanding investments in Internet data center (IDC) capacity. 
Although the company is pursuing various options to refinance or repay the 
bonds, we believe some of these initiatives are still in the early stages.

In our view, the Dr. Peng management is taking steps to ease the liquidity 
pressure. The company has pledged its submarine cable assets to secure credit 
lines of US$150 million, of which US$65.4 million has been disbursed. It has 
also redeemed US$77 million of offshore bonds with cash on hand. However, the 
debt shortfall is considerable after we take into account the interest 
expense. Additional refinancing options including collecting prepayments for 
submarine cable services or asset disposals are subject to execution risks and 
uncertainties around the timing and amount. That said, some initiatives could 
resolve the offshore bond maturity if smoothly executed.

We believe it is premature to conclude if Dr. Peng's considerable efforts to 
improve its relationship with banks will pay off. The company's banking 
relationships remain limited as indicated by the lack of access to long-term 
bank financing and interactions with state-owned banks. The credit lines from 
local banks are short-term and not sizable. 

We believe Dr. Peng remains committed to rapidly expanding IDC capacity over 
the next two to three years. This is a key strategic focus for the company as 
it seeks to offset the lackluster performance of its fixed-line broadband 
business. To fund investments for such business transition, Dr. Peng could use 
project financing, finance leases, and other debt-like arrangements. 
Therefore, we expect its leverage to reach 3.3x-3.7x in 2019, from 2.2x-2.6x 
in 2018. The company's rising leverage could further weigh on its ability to 
manage liquidity and get refinancing.

The negative outlook reflects the pressure on Dr. Peng's liquidity over the 
next 12 months because of the company's significant offshore and domestic bond 
maturities. While Dr. Peng is exploring refinancing and repayment options, 
many plans are in early stages.

We could lower the rating if Dr. Peng's liquidity deteriorates. This could be 
a result of faster cash burn than our already high estimates.

We could also downgrade Dr. Peng if the company's debt leverage approaches 5x, 
possibly due to poor operating results or aggressive debt-funded capital 
expenditure. We view a liquidity driven downgrade as more likely.

We could revise the outlook to stable if Dr. Peng improves its liquidity 
through a highly credible refinancing plan with minimal execution 
uncertainties or a significant improvement in cash flows.
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