SoftBank telecom arm listing raises $33-bn debt worry

Billionaire Masayoshi Son’s plan to list his cash-cow Japanese telecom business is raising concern among observers that the company might stop guaranteeing the debt of its parent SoftBank Group, worsening the quality of its credit.

The mobile division SoftBank assures payments to investors on $33.4 billion in bonds of its parent, which is rated junk by Moody’s Investors Service and S&P Global Ratings, according to Bloomberg-compiled data. The unit needs to prove its independence to get listed on the Tokyo Stock Exchange, meaning that it probably would have to cancel the guarantees to pass the test, according to Japan Credit Rating Agency and Asahi Life Asset Management.

“It’s the mobile company that’s generating cash flows, so its guarantees have been a source of a very strong sense of assurance” for bond investors, said Yoshihiro Nakatani, senior fund manager at Asahi Life Asset. “It would be a problem morally” if it canceled them without negotiating with investors, he said.

The focus on SoftBank’s bond guarantees highlights how the market remains concerned about the broader company’s huge debt that it’s accumulated making investments around the globe. The firm’s total debt has climbed 28 per cent in two years to 15.8 trillion yen ($149 billion) at the end of last year, and its bond-default risk is among the highest in Japan. SoftBank’s yield premiums would likely rise if it got rid of its guarantees without introducing any new form of assurance, according to Nomura Holdings.

In news conferences and analyst meetings, SoftBank hasn’t made clear its plans for the guarantees. SoftBank spokesman Mitsuhiro Kurano declined to comment.Yield premiums on SoftBank’s six per cent dollar-denominated perceptual bonds have risen 27 basis points to 398 since Son unveiled the IPO plan on February 7, according to Bloomberg- compiled data. Credit-default-swap protection costs against debt nonpayment by the company have also increased 8 basis points to 168, based on CMA data.

The gains in CDS in the period around the announcement of the IPO plan were in line with broader domestic market moves so it’s wrong to pin the blame on SoftBank, said spokeswoman Hiroe Kotera by email.

SoftBank’s domestic telecom operations accounted for about 53 per cent of its 1.15 trillion yen in operating profit in the nine months ended December 31, 2017, according to company data.

The firm’s market capitalisation has lagged below the value of its assets.