SoftBank faces Moody’s downgrade rating over $120b debt

Photo: Reuters

SoftBank Group Corp’s debt — which is set to swell as its latest global acquisition becomes effective on Monday—is nearing a level at which Moody’s Investors Service has said it will consider a rating downgrade.

The Japanese wireless carrier’s purchase of British semiconductor designer ARM Holdings Plc for about $32 billion looks set to add to group debt, which at $115 billion on 31 March is five times its adjusted earnings, according to Moody’s.

The rating company says any sustained climb above 5.5 times could be a “downward trigger” on its evaluation.

“I’d expect it will go up higher than our expectations, so that reflects relatively negatively on overall credit,” Motoki Yanase, an analyst at Moody’s in Tokyo, said in an interview.

While exceeding the trigger doesn’t result in an immediate ratings downgrade, if sustained, it increases the chances of one and Moody’s will have to watch to see how SoftBank can “deleverage over the next few years,” Yanase said.

SoftBank will issue at least ¥350 billion ($3.4 billion) in subordinated bonds to mainly individuals this month, and is marketing additional tranches of debt to institutional investors as it faces more than ¥1.7 trillion in bond redemptions to the end of 2018.

While the company’s share price is rallying and the cost of insuring its bonds from non-payment is falling, the Bloomberg Default-Risk Model signals deterioration in the firm’s creditworthiness this year.

Hiroe Kotera, a spokeswoman for SoftBank in Tokyo, wasn’t immediately able to comment.

SoftBank’s share price has climbed 12% since the start of the year, and the cost to insure against a default on its bonds has almost halved to 129 basis points in the same period.

Even so, the risk of non-payment in the coming 12 months has risen to 0.5% from about 0.3% at the start of the year, according to the model, which tracks metrics including share price, debt and cash flow. Its borrowings stood at the equivalent of $120 billion as of 30 June.

Moody’s has a Ba1 rating on SoftBank, its highest speculative grade, and a B3 rating on its US subsidiary Sprint Corp., five levels lower.

The Japanese company is selling hybrid bonds this month with maturities of 25 years or longer that are callable in advance.

Japan Credit Rating Agency Ltd and S&P Global Ratings said last month they will count 50% of the bond sales toward equity, and the issuance supports their respective ratings of Tokyo-based SoftBank. Moody’s Yanase said there is a “very high hurdle” for it to count the deal as having any equity content, as it doesn’t provide such partial credits to company rated at non-investment grade.

Makiko Yoshimura, an analyst at S&P in Tokyo, said in an interview that she expects SoftBank’s debt-to-earnings before interest, taxes and depreciation and amortization to improve because of the hybrid debt sale.

JCR reaffirmed SoftBank’s rating at A- last month, citing factors including an improvement in earnings at Sprint, the strength of SoftBank’s domestic telecommunications business, and the hybrid securities.

“Although it is good to have lower-ranked securities in the capital structure, it is going to be a part of total debt anyway,” said Moody’s Yanase. “It is going to increase the total leverage so that is certainly credit negative.”

Also Read

SoftBank’s Masayoshi Son makes biggest bet in long career backing tech

Moody’s Acquires Full Ownership of Korea Investors Service (KIS)

Japan’s SoftBank says it may issue $9.8b in hybrid bonds

Bloomberg

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.