Investing.com -- Moody’s Ratings has given an A3 senior unsecured rating to the proposed senior unsecured notes that Baidu Inc (NASDAQ: BIDU ). intends to issue. The proposed issuance is expected to extend Baidu’s debt maturity profile, providing the company with financial flexibility and boosting its capacity to meet its funding needs over the medium term, according to Shawn Xiong, a Vice President and Senior Analyst at Moody’s Ratings.

Xiong also anticipates that Baidu will maintain its prudent financial discipline and a solid credit profile, which will offer buffers against competition and its ongoing investment in artificial intelligence (AI).

Baidu plans to utilize the net proceeds from the proposed notes issuance for general corporate purposes. This includes repayment of certain existing indebtedness, payment of interest, and other general corporate purposes.

The A3 issuer rating assigned to Baidu reflects the company’s position as one of China’s leading AI companies and providers of online advertising services. The rating also takes into account the company’s steady free cash flow, disciplined acquisition appetite, and a history of recovering from temporary difficulties in its businesses.

However, these strengths are balanced by Baidu’s exposure to China’s competitive internet market and its constant investment requirement as it continues to expand its AI-powered platform.

Moody’s expects Baidu to increase its revenue by 2%-3% per annum over the next 12-18 months. This is due to the growth of its AI-enabled businesses, which will partially offset the slower growth in core search revenue.

Baidu’s adjusted EBITDA margin is forecasted to remain stable at around 30%-33% over the next 12-18 months. The company’s cost optimization measures are expected to counterbalance the negative effects of its shifting revenue mix toward lower-margin segments.

In the next 12-18 months, Baidu’s leverage, as measured by adjusted debt/EBITDA, is expected to remain largely stable at below 2.0x. The company managed to improve its debt leverage to around 1.7x in 2024, down from 1.9x in 2023.

As of the end of December 2024, Baidu had a strong liquidity position, with around RMB127 billion in cash, cash equivalents, and short-term investments. This compares with RMB22.4 billion in debt maturing over the next 12 months.

Moody’s anticipates Baidu’s operating cash flow and its cash and cash-like resources will likely cover its planned capital spending and acquisitions adequately. This strong cash balance, along with the strong and stable cash flow from its core search business, should be sufficient to cover its investment needs.

The stable outlook reflects Moody’s expectation that Baidu will maintain credit metrics consistent with its A3 rating, including strong credit quality through the business cycles, excellent liquidity, prudent financial policy, and a solid net cash position.

Despite the need for new investment, an upgrade is unlikely in the medium term. However, upgrade pressure could emerge over time if the company establishes a longer track record of monetizing its new product initiatives, and if it continues demonstrating a balanced use of its funding channels as it expands its business scale and scope while maintaining a strong financial profile.

On the other hand, downward rating pressure could emerge if Baidu fails to maintain a steady EBITDA due to a deterioration in its market position and a subsequent decline in its market share, which in turn affects its revenue growth and/or cash flow generation. Other factors that could lead to a downgrade include aggressive investments or acquisitions that strain its balance-sheet liquidity or increase its overall risk profile, or financial stress at or material capital calls from its subsidiaries.

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