Rating Action:
Moody's assigns A3 to Tencent's $2.5 billion Medium Term Notes
Global Credit Research - 23 Apr 2014
Hong Kong, April 23, 2014 -- Moody's Investors Service has assigned an A3 rating to Tencent Holdings Limited's US$2.5 billion Medium Term Notes drawn under its US$5 billion GMTN programme.
The rating outlook is stable.
RATINGS RATIONALE
"The drawdown of the GMTN programme will further enhance Tencent's already strong liquidity, enabling the company to sustain a steady growth trajectory in revenue and cash flow," says Lina Choi, a Moody's Vice President and Senior Analyst.
Tencent enjoys material and sustainable revenue contribution from its highly competitive online games products, which account for more than 50% of total revenue. Over the past two years, its online games revenue has grown by 35%-45%, due primarily to its diverse game portfolio with in-house and licensed titles.
"The additional debt will not affect Tencent's A3 credit profile and will substantiate its financial flexibility," adds Choi, also the Lead Analyst for Tencent.
Supported by its steadily growing operating cash flow, Tencent's adjusted debt/EBITDA of 0.9x at end-2013 combined with its US$6.6 billion net cash position is strong when compared with most A3-rated peers.
After the company issues the US$2.5 billion Medium Term Notes, Moody's expects it will maintain a strong net cash position and adjusted debt/EBITDA at around 1.0x-1.75x over the next 12-18 months, which is consistent with its A3 rating.
The stable outlook reflects Moody's expectation that Tencent will maintain its strong financial profile and leadership in China's internet market, while pursuing acquisition opportunities to complement its business model.
While Moody's does not see near term upward pressure on the ratings, such pressure may arise if Tencent: (1) continues to achieve strong revenue and cash flow growth; (2) develops and monetizes new mobile products without substantial cannibalization of current revenue streams; and (3) maintains prudent financial management, as evidenced by strong credit metrics, such as debt/EBITDA below 0.5x-0.75x, and an overall net cash position.
Downward rating pressure could emerge if Tencent: (1) experiences sustained erosion in its active user base, affecting monetization and cash flow generation; (2) engages in aggressive acquisitions that pressure its balance sheet liquidity, or raises its overall risk profile; (3) undertakes an aggressive dividend policy that weakens its balance sheet liquidity, or there is evidence of cash leakage to its parent, or related companies; and/or (4) sees its credit profile weaken, with debt/EBITDA exceeding 1.5x-2.0x, and recording a net debt position.
Furthermore, adverse developments in the regulatory regime that could affect Tencent's operations or business model will be negative for the ratings.
Tencent Holdings Limited's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Tencent Holdings Limited's core industry and believes Tencent Holdings Limited's ratings are comparable to those of other issuers with similar credit risk.
Tencent Holdings Limited is a leading provider of comprehensive Internet services in China. It operates leading social networking services, online portals and online games platforms. Tencent is approximately 34%-owned by Naspers Limited (Baa3 stable).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on
www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see
www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on
www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
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