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Rating Action:

Moody's assigns first-time B1 CFR to 21Vianet; outlook stable

 The document has been translated in other languages

29 Mar 2019

Hong Kong, March 29, 2019 -- Moody's Investors Service has assigned a first-time B1 corporate family rating to 21Vianet Group, Inc. At the same time, Moody's has assigned a B1 senior unsecured rating to the proposed bond to be issued by the company.

The ratings outlook is stable.

The proceeds from the proposed issuance will be used for refinancing its existing indebtedness, for future capital needs and for general corporate purposes.

Moody's expects that 21Vianet will complete the note issuance upon satisfactory terms and conditions, including proper registrations with the National Development and Reform Commission in China (A1 stable).

RATINGS RATIONALE

"21Vianet's B1 corporate family rating reflects its solid market position in the internet data center (IDC) space, its strategically located data centers, partnerships with leading cloud service providers, and operational support from its key shareholder -- Tus-Holdings Co., Ltd.," says Danny Chan, a Moody's Analyst.

"21Vianet is well positioned to capture growing demand in the steadily growing IDC and cloud service market in China, which will help grow its recurring cash flow," adds Chan, who is also Moody's Lead Analyst for 21Vianet.

21Vianet is one of the major players in the IDC market in China with over 20 years of operating history. It has also partnered with global cloud service providers, including Microsoft Corporation (Aaa stable) and International Business Machines Corporation (A1 ratings under review), to deliver their cloud services in China.

Currently, it operates about 30,000 cabinets in over 50 data centers in China, the majority of which are located in first-tier cities where the demand for datacenters has proven resilient through economic cycles. IDC operations represented two-thirds of its total revenues in 2018.

21Vianet registered revenue and adjusted EBITDA of RMB3.4 billon and around RMB1.0 billion, respectively, in 2018. While revenue remained flattish from a year ago, its adjusted EBITDA increased by about 80% year-on-year in 2018, following the spinoff of its loss-making content delivery network (CDN) services, hosting area network services, route optimization and last-mile broadband businesses.

Moody's expects 21Vianet's revenue and adjusted EBITDA will grow 10%-15% per annum in the next two years, driven primarily by 5,000-10,000 new cabinet additions per annum.

Moody's also expects the company to maintain stable profitability with adjusted EBITDA margins ranging between 30% and 32%. This is supported by the stable monthly recurring revenue (MRR) from its IDC business. IDC MRR per cabinet has gradually improved to about RMB8,500 from RMB7,500 over the past 24 months.

21Vianet's rating is constrained by its relatively limited scale, its revenue concentration in the data center business, and its investment needs for capacity additions in the next one to two years.

However, these constraints are partially mitigated by healthy industry prospects, its diversified client base, and the company's strong liquidity buffer.

Its customer base is very diverse, with about 5,000 clients spanning various industries, such as e-commerce, social networking, finance and insurance. These customers sign multiple-years contracts with 21Vianet, and more than 90% of the company's revenue is recurring in nature.

Moody's expects 21Vianet to spend around RMB600-700 million per annum on new cabinets in the next two years, compared to around RMB700-800 million per annum of consolidated operating cash flow expected for the same period. Moody's has also built in a buffer for potential small bolt-on M&A activities, funded with cash and debt.

Despite its investment needs, Moody's expects earnings and cash flow growth will help moderate the need for debt-funded expenditure and maintain the company's debt leverage.

The company's leverage, as reflected in adjusted debt/EBITDA, will stay flat around 3.25x-3.5x in the next 12-18 months, compared with 3.5x at the end of 2018. Its interest coverage, as reflected in adjusted (EBITDA-CAPEX)/interest expense, will remain at around 2.0x. These credit metrics position the company's rating appropriately at the B1 level.

21Vianet's ratings also consider operational support from Tus-Holdings Co. Ltd, a state-owned science park operator controlled by Tsinghua University. At the end of 2018, Tus-Holdings held 21.4% of 21Vianet's equity ownership and 51.0% of its voting rights.

Moody's expects that Tus-Holdings can provide operational support, such as providing land reserves, as well as leveraging its relationships with financial institutions and local governments.

21Vianet's liquidity is adequate. At the end of 2018, its cash on hand and short-term investments, including term deposits and treasury investments, totaled RMB2.9 billion. This is sufficient to cover its short-term debt of RMB345 million and its USD300 million notes puttable in 3Q 2019 with their final maturity in August 2020.

On 29 March, 21Vianet announced a tender offer for any and all outstanding existing notes due in August 2020 with an outstanding principal amount of about USD300 million. The tender offer will expire on 8 April 2019.

Under the offer, for each USD1,000 principal amount of the outstanding existing notes, the holders will receive USD1,006.25 in aggregate principal amount of the proposed notes and capitalized interest in the form of the proposed notes.

Moody's does not regard this tender offer as a distressed exchange -- which is considered as a default event under Moody's definition -- because the holders will not incur economic loss as the tender offer is above the par value of the existing notes. The proposed new USD notes issuance is to mainly fund the aforesaid tender offer. Successful refinancing will improve 21Vianet's debt maturity profile and strengthen its liquidity.

21Vianet's senior unsecured bond rating is not affected by subordination to claims at the operating company level. This is because the holding company owns key licenses to operate its business, which will support an expected recovery in the holding company's debt.

The stable outlook on 21Vianet reflects Moody's expectation that the company will grow its revenue, while maintaining stable profitability and leverage, operational support from Tus-Holdings, and sufficient liquidity.

The ratings could be upgraded if the company (1) continues to grow revenue, improves profitability and controls debt growth, as reflected in stable adjusted debt/EBITDA below 3.0x-3.5x; and 2) generates higher positive free cash flow, both on a sustained basis.

The ratings could be downgraded if the company (1) pursues an aggressive expansion plan or acquisitions using debt funding, such that debt leverage - as measured by debt to EBITDA - stays above 4.0x-4.5x on a sustained basis; (2) experiences a significant decline in the operational support provided by the Tus-Holdings, such as a reduction in the shareholding which is held by Tus-holding; or (3) its profitability, cash flow, or liquidity weakens, such that its cash/short-term debt ratio falls below 1.5x.

The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

21Vianet Group, Inc. is the largest carrier and cloud neutral internet data center services provider in China. It has over 50 data centers across more than 20 cities in China. It also provides broadband internet access and complementary value-added services, such as cloud services, Virtual Private Networks (VPN) services and hybrid IT services.

Headquartered in Beijing, 21Vianet was founded in 1999 and listed on the NASDAQ in 2011. At the end of 2018, Tus-Holdings Co. Ltd., a stated-owned enterprise and the largest shareholder, owned a 21.4% equity stake with 51.0% of voting rights, and co-founder & Chairman Mr. Sheng Chen owned a 7.3% equity interest with 15.3% of voting rights.

Tus-Holdings Co., Ltd. (TUS) is a leading science park operator and technology services provider in China. The company was founded in 1994 and is headquartered in Beijing. Tus-Holdings is a state-owned enterprise controlled and supported by the Ministry of Education, Ministry of Finance, and Tsinghua University. Tsinghua (TH) Holdings owned 44.92% at the end of 2018.

REGULATORY DISCLOUSRES

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

Danny Chan
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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