SoftBank has $140B in debt, but banks picture nearly a billion in fees
‘Decisions come down to game theory,’ one banker says, where a loan decision hinges on what each bank thinks other banks will do
TOKYO— With more than $140 billion (U.S.) in debt and a junklevel credit rating, SoftBank Group Corp. might not look like an obvious candidate for more borrowing. Yet bankers say they are still eager to lend to the world’s largest technology investor.
One reason is the big fees a relationship with SoftBank can bring in—especially the hundreds of millions of dollars in investment-banking fees generated each year by Chief Executive Masayoshi Son’s constant stream of deals.
Another is a shift in strategy over the past several years culminating in a change in SoftBank’s corporate structure last year that has allowed both banks and credit-rating firms to view it as an investment holding company rather than as a mobile-phone operator.
The trouble is some of those investments can be extremely volatile. SoftBank was a major investor in Uber Technologies Inc., for example, whose shares have dropped sharply since its initial public offering last week and caused SoftBank shares to fall too.
Although SoftBank is the parent of Sprint Corp. in the U.S. and a similar company in Japan, lenders now tend to believe—as Mr. Son has long maintained—that SoftBank Group wouldn’t have to pitch in if Sprint had trouble paying creditors. “SoftBank Group cannot make payments on behalf of subsidiaries,” Mr. Son said last week. “Doing so would damage shareholder value for something that SoftBank Group is not obligated to do.”
Sprint recently told U.S. regulators that it was “not on a sustainable competitive path” and cited an analyst’s comment that the company would have to consider a filing under chapter 11 of U.S. bankruptcy law if its merger with T-Mobile US Inc. was blocked by regulators.
Until a few years ago, SoftBank owned 100% of its Japanese telecommunications unit and was generally viewed by analysts and credit raters, especially in Japan, as primarily a telecoms company. The telecoms debt makes up the majority of SoftBank’s total of ¥15.7 trillion ($144 billion) in liabilities. Credit analysts had a hard time imagining that SoftBank would disown telecoms debt.
Then in 2017, SoftBank started its nearly $100 billion Vision Fund, with investment by Saudi Arabia’s sovereign-wealth fund, and started plowing money into the world’s most valuable startups, including ride-hailing company Uber. In December 2018, it listed the Japanese telecoms unit in Tokyo.
Following the listing, Moody’s and S&P said they were reclassifying SoftBank as an investment company. S&P also revised its outlook on SoftBank to stable from negative, while Moody’s said it could consider an upgrade if the company can sustain returns.. Both still rate SoftBank debt as below investment grade.
Loans to SoftBank Group are ultimately backed by valuable holdings such as a stake in Chinese e-commerce giant Alibaba Group Holding Ltd., while the Vision Fund’s borrowings are backed by its stakes in the likes of Uber and shared-officespace company WeWork Cos. SoftBank says its shareholdings are worth $245 billion.
The downside of the Vision Fund assets is that young money-losing companies such as Uber don’t produce cash flow.
“Shareholder value doesn’t immediately repay debt,” said one banker in Tokyo, observing that bankers would rather see more cash on hand and real assets such as land. Nonetheless, he said debtholders were confident that when their debts came due, SoftBank could always raise more debt to repay them on the back of its shareholdings.
Another downside is volatility in the SoftBank and Vision Fund holdings. Last week, SoftBank booked a $3.8 billion valuation gain on the Vision Fund’s 16.3% stake in Uber.
But Uber’s share price has fallen 18% since its listing on Friday, approaching the level SoftBank paid for the stock in January 2018.
That reality check on Uber led SoftBank shares to tumble. SoftBank finished Tuesday trading in Tokyo at a threemonth low, down 5.4% on the day and more than13% cumulatively in the past three trading days. Still, the Vision Fund touts gains on companies such as Guardant Health, which develops tests for early cancer detection, and Oyo, an Indian app for booking budget hotels. Such gains, even if unrealized, have helped bondholder sentiment, said Toshihiro Uomoto, chief credit strategist at Nomura Securities.
The price of five-year SoftBank credit-default swaps—reflecting the price investors must pay for protection against a SoftBank default—has shrunk to about 1.80 percentage points, down more than 1 percentage point since the beginning of the year.
Mr. Son, SoftBank’s CEO, said last week that he was planning a $100 billion Vision Fund 2. The big new investment pie, if realized, means more fees for bankers.
SoftBank was the top corporate payer of investment banking fees last year, according to data provider Refinitiv. It paid $894 million, more than double the second-biggest payer, Bayer AG.
“Nobody wants to be left out,” said David Gibson, chief investment adviser at Astris Advisory Japan.
Lending to SoftBank isn’t about risk analysis, said a banker in Tokyo. “Decisions come down to game theory,” where a loan decision hinges on what each bank thinks other banks will do.
SoftBank told analysts Friday that the Vision Fund has received a $3.1 billion credit facility for four years from 10 banks, led by Mizuho Financial Group Inc. and Goldman Sachs Group Inc.
Last year, Goldman Sachs, Deutsche Bank AG, Nomura Holdings Inc. and others made a loan of about $7 billion to the Vision Fund to help it maintain its investment pace while it waited for limited partners to provide more capital, people familiar with the matter said. The three financial firms declined to comment. When SoftBank listed its Japanese mobile unit in December, raising $23.5 billion, it chose Goldman Sachs, Deutsche and Nomura as lead underwriters.
SoftBank has also been aggressively wooing individual Japanese investors for funding. It sold ¥500 billion, or nearly $5 billion, in bonds to individual investors in April and announced a 2-for-1 share split on Thursday, making it easier for those investors to buy in.