20211109-招银国际-VNET__B2_B_rated__–_3Y_New_Issue__FV_8.7__3页_513kb

CMBI Credit Commentary Summary

Core Content

The document provides a credit commentary on VNET, a company rated B2/B with a stable outlook, regarding a proposed 3-year USD bond issue at an interest rate of 8.75%. The analysis evaluates the investment attractiveness of the bond based on VNET's financial position, funding needs, and market conditions.

Main Points

• Bond Issuance Details: VNET is proposing a 3-year USD bond at an interest rate of 8.75%.
• Credit Rating: The company is rated B2/B, with a stable outlook.
• Fair Value Assessment: The fair value of the bond is estimated at 8.7%, which is 20bps premium over the mid-point of EHICAR 24 (YTM 7.66%) and CARINC 24 (YTM 9.25%).
• Funding Requirements: VNET is pursuing aggressive expansion, guided by RMB 5bn – RMB 5.5bn annual capex, leading to a projected annual free cash flow deficit of RMB3.5bn over the next two years.
• Equity Funding Constraints: The company's equity funding channels are narrowing, and its VIE structure along with Chinese internet regulations are contributing to this challenge.
• Recent Financing: VNET raised an additional RMB900mn in bank loans during the first half of 2021, increasing its total bank loan balance to RMB1,827mn as of June 2021.
• CB Repurchase Rights: The company's convertible bond (CB) holders have the right to require repurchase of all or part of the CBs on Feb 2023 and Feb 2024, or in the case of fundamental changes. These rights could trigger repurchases earlier than the USD bond's maturity in November 2024.
• CB Conversion Prices: The conversion prices for the CBs are USD12 and USD54.47 per ADR, with the latter being significantly out of the money compared to the current share price of USD16.

Key Information

• Market Outlook: The wholesale IDC segment is expected to contribute 12%–17% of 21Vianet's data center revenue by 2021 and about 30% in 2022.
• Risk Factors:
  • High capital expenditure needs
  • Negative free cash flow outlook
  • Narrowing equity funding channels
  • Regulatory and structural challenges
  • Potential early repurchase of CBs
• Investor Considerations:
  • The company's funding needs are significant and may not be easily met
  • The USD bond is not considered attractive due to these factors
  • Investors are advised to seek independent evaluation and consult with financial advisors

Additional Notes

• The report is authored by Polly Ng, Glenn Ko, Wilson Lu, and James Wen from CMBI Fixed Income.
• It includes author certification and important disclosures, emphasizing that the information is not tailored to individual investors and that there are risks involved in investing in securities.
• The document is subject to legal restrictions and is only intended for specific recipients in different jurisdictions, including the UK, US, and Singapore.

Disclaimer

• UK Recipients: The report is only provided to persons falling within Article 19(5) of the Financial Services and Markets Act 2000 or to High Net Worth Companies, etc., as defined in the Order. It may not be provided to others without prior consent.
• US Recipients: CMBIS is not a registered broker-dealer in the US, and the report is only for distribution to "major US institutional investors" as defined under Rule 15a-6. It cannot be distributed to other persons in the US.
• Singapore Recipients: The report is distributed by CMBISG, an Exempt Financial Adviser in Singapore, and may only be provided to certain investors. Non-accredited recipients should contact CMBISG for legal responsibility details.