SoftBank survived WeWork, but the coronavirus credit rout is turning investors against Masayoshi Son’s empire
Investors are growing increasingly skittish about the stability of Masayoshi Son’s empire.
Son’s SoftBank Group Corp., one of Japan’s most indebted companies, had been chipping away in recent years at concerns about its ability to carry that burden. As the founder remade the telecom company into a tech investor, analysts reassessed the debt in terms of the value of SoftBank’s shareholdings, a gauge that had made its balance sheet appear more manageable.
But the coronavirus pandemic is threatening to undo that progress, as it pulls down equity markets and triggers the worst sell-off in credit markets since the 2008 financial crisis. It’s sparked a dramatic surge in the price of insuring against defaults around the world, including SoftBank’s. The company’s credit-default swaps have spiked to the highest in a decade.
“SoftBank has refinancing needs and constantly faces new fundraising needs, so it would be difficult to access funds if the current credit market turmoil continues,” said Hiroyuki Nishikawa, an analyst at S&P Global Ratings. The base scenario still remains that SoftBank has cash reserves to repay debt for the next two years, he added.
There has been no change in SoftBank’s financial policy of focusing on loan-to-value and having enough liquidity on hand to cover two years worth of bond repayments, the company said in an emailed statement. SoftBank said it is curbing new investments to match the current environment and acknowledged that fundraising costs are likely to rise going forward.
S&P cut its outlook on the group to negative late Tuesday, citing the broad market declines and the conglomerate’s plans for a share buyback. SoftBank shares plummeted 11% in Tokyo on Wednesday, the largest decline since 2012.
Indeed, its stock has plunged 38% in the last month. Its market value of 6.78 trillion yen ($63.5 billion) is now less than that of SoftBank Corp., the domestic telecom operation that sold shares to the public last year. SoftBank Group still owns about two-thirds of the unit, which on Wednesday rose 1.4%.
“No other company in Japan is as indebted and as exposed to the economic downturn as SoftBank,” Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte. in Singapore, who is short on SoftBank, wrote in a note to clients. It seems that Son’s “run of good luck has finally come to an end and his shoot-from-the-hip investment style is blowing up the group.”
The company is more vulnerable because of missteps at the Vision Fund, the $100 billion investment vehicle that Son set up to become the new centerpiece of his empire. The founder used the money to take stakes in scores of marquee startups, including WeWork and Uber Technologies Inc.
But WeWork flopped in its effort to go public last year and fueled broader concern about the prospects for other money-losing startups. SoftBank engineered a $9.5 billion bailout for WeWork and had to take enormous writedowns on the value of its portfolio.
Then last month, activist investor Elliott Management Corp. disclosed a stake in SoftBank, arguing its shares were undervalued and that Son should buy back as much as $20 billion. SoftBank said on March 13 it would spend up to 500 billion yen ($4.7 billion) buying shares.
S&P responded by cutting its outlook for SoftBank, saying the decision “strongly underscores its aggressive financial management.” SoftBank shares, which typically rally with a buyback, have dropped about 18% since the announcement.
The company has traditionally enjoyed strong support from individual bond investors in Japan, thanks to the ubiquity of its brand in the country. The SoftBank name is on one of the largest wireless carriers, Japan’s leading web portal and the champion Fukuoka SoftBank Hawks baseball team. The question is whether this bedrock will hold if the current market turmoil persists. SoftBank has about 2.3 trillion yen of bonds and loans coming due in the next three fiscal years.
Son has argued that he has more than enough assets to cover the debts. The company’s most liquid investments, its stakes in Alibaba Group Holding Ltd. and the SoftBank Corp. unit, are worth about 13 trillion yen and 4.6 trillion yen respectively. Chipmaker Arm Holdings Plc, owned entirely by SoftBank Group, is worth 2.7 trillion yen by the company’s own calculations.
”Clearly the bond market is worried, but we keep coming back to the Alibaba stake, which can more than cover SoftBank’s outstanding debt,” said Dan Baker, an analyst at Morningstar Investment Management Asia Ltd. “Selling during this turmoil means they would have to do it at a lower price, which might make it a last resort.”
SoftBank is taking steps to preserve cash. This week, the company told shareholders of WeWork that it could withdraw from an agreement to buy $3 billion of stock in the embattled co-working business.
Son has said that he wants to keep SoftBank’s loan-to-value ratio, a key metric looking at its net interest-bearing debt against the value of investments, below 25%. S&P said that the gauge would likely be about 30%-35% in the coming year or so.
“The announced buyback is a reminder that all strategic decisions will be taken by Masa Son, who in the face of market uncertainty continues to put SoftBank equity over creditors, without so much as a nod to risk management,” analysts at CreditSights including Mary Pollock wrote in a note.
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