Rating Cut Raises Fresh Alarm Over Chinese Telecom Firm’s Debt

(Bloomberg) -- China’s largest private telecommunications services provider is under deeper stress, after a global credit risk assessor cut its rating and labeled a delayed bond repayment by the firm a de facto default.

The latest ratings downgrade and warning about refinancing risk by Moody’s Investors Service deals a fresh blow to Dr. Peng Telecom & Media Group Co. The company has seen its debt load spike and cash flow contract, weakening its ability to cope with a looming bond maturity wall.

A virus-induced dramatic economic slowdown is making life even harder for a firm already threatened by fierce industry rivalry, as well as an uncertain outlook for its efforts to transform itself into a technology company focusing on big data and cloud computing services.

What’s the company:

Founded in 1985 as a special steel maker in the western city of Chengdu, the company was among China’s first generation of listed firms with a debut on the Shanghai Stock Exchange in 1994. Mostly via acquisitions, the company transformed itself into a telecom services provider in the early 2000s, with a new look and a new name.

Dr. Peng now boasts a wide array of services ranging from broadband access to big data and cloud computing. Employing 23,000 staffers worldwide, it offers services to over 13 million households in more than 200 cities in both China and North America.

Dr. Peng’s debt-to-asset ratio reached 95% as of the end of March, up from 69% from a year ago. Its net cash flow from operating activities in the first quarter this year shrank 312.3% on year to 278.3 million yuan ($39.3 million).

What’s happening:

Joining a growing number of distressed Chinese borrowers to seek temporary debt reprieve, Dr. Peng proposed late last month to extend the maturity on its $422 million dollar bond by 18 months to Dec. 1, 2021. Dr. Peng said it will repay the principal by installments and the interest rate on the note will be raised to 7.55% from 5.05%. The vast majority of bondholders approved the plan.

However, the repayment delay prompted Moody’s to cut Dr. Peng’s rating to Caa3 from Caa1 last week. Moody’s said the borrower’s bond maturity extension represents an economic loss for investors and that it views the amendment as a way for Dr. Peng to avoid a default given its constrained liquidity.

“The proposal can therefore be viewed as a distressed exchange, which is a default under Moody’s definition,” Moody’s said.

The only consolation for Dr. Peng is that its bond that will mature in December 2021 has gained 4 cents on the dollar after it announced the delayed repayment plan. It shows that although the proposal was a clear sign of stress, investors considered it a better deal than an outright and likely messy default. Its shares have risen 8% in the same period, according to data compiled by Bloomberg.

Why does it matter:

As the coronavirus outbreak wreaks havoc on China’s economy, concerns have persisted that Dr. Peng could become the next high-profile private sector debt failure.

Chinese private firms have by far dominated defaults in China’s $4.9 trillion corporate bond market since Beijing started allowing onshore bond failures to occur in 2014.

Dr. Peng has a worrisome pile of debt: it has $827 million worth of debt in total, including both loans and bonds, with $338 million coming due in 2021, according to data compiled by Bloomberg.

In a sign that it is scrambling to secure refinancing, Dr. Peng announced a plan in March to raise 2.46 billion yuan via follow-on stock sales. The proposal needs regulatory approval.

What does the company say:

Given the challenging business operating environment, including unexpected delays to the completion of certain key projects and asset disposal plans, the recent dollar bond repayment delay proposal is the best offer that the company can make, Dr. Peng said in a filing dated April 27 on the Singapore Exchange.

Calls to Dr. Peng’s office for securities information disclosure went unanswered.

What do ratings companies say:

Moody’s said Dr. Peng’s latest plan to delay its dollar bond repayment highlights the severe challenges it faces because of the intense competition among broadband internet access operators in China and the uncertainty over its ongoing business transformation. “This situation will continue to strain the company’s cash flow and liquidity,” the ratings firm said.

Moody’s added that the negative ratings outlook assigned to Dr. Peng reflects its continued concerns over the company’s tight liquidity and ability to arrange funding on time to meet its obligations.

Chinese credit risk assessor United Credit Ratings Co. said in February it has put Dr. Peng on a watch list for a potential downgrade due to concern over its heavy loss last year.

What are traders watching next:

Investors are awaiting a decision from China’s securities watchdog on Dr. Peng’s proposed follow-on stock sale. The company has said it will use other sources of funds to meet bond repayments before the refinancing plan materializes.

©2020 Bloomberg L.P.

With assistance from Bloomberg