Business / Corporate

SoftBank's giant debt burden looks worse than it actually is, analysts say

by Kevin Buckland

Bloomberg

As SoftBank Group Corp. continues its transformation into a giant investment fund, some analysts are increasingly watching a metric more familiar to lenders as they judge its creditworthiness. And by that gauge, they say, its massive debt pile looks manageable.

SoftBank’s loan-to-value ratio, its net interest-bearing debt over the value of its investment portfolio, is less than 20 percent, according to separate calculations by Daiwa Securities Group Inc. and SMBC Nikko Securities Inc. The company’s own goal is to keep it under 35 percent, a level that Daiwa considers conservative.

SoftBank, which controls the world’s biggest investment vehicle in the almost $100 billion Vision Fund, has been suggesting so-called LTV as a better measure of its leverage since at least mid-2017, when it was included in an earnings presentation. That isn’t to say concern about the company’s debt has disappeared. The major global credit assessors rate the group at junk, and its bond risk is among the highest for Japanese borrowers.

But the metric has taken on more importance since the initial public offering of SoftBank Corp. finally scythed the telecom business off from the holding company.

Even if the ratio climbed to 70 percent, it would be reasonable because that’s the standard proportion of a company’s capital that a Japanese bank will lend against, said Toshiyasu Ohashi, Daiwa’s chief credit analyst.

“It’s precisely because they are quite cautious about their own financial situation that they can do big money investments,” he said.

Ohashi puts the ratio at 17.7 percent in January, based on net debt of about ¥4.5 trillion at SoftBank Group.

SMBC Nikko analyst Kentaro Harada put the figure at “below 20 percent” in a report last month, and called it “easily at a level appropriate for its current credit ratings.” The gauge is more commonly used to measure lending risk by comparing the size of a loan against the value of an asset. It is used at private equity firms, to which SoftBank has been compared, and is also often used by mortgage lenders.

On a consolidated basis, its debt comes to about ¥16.6 trillion, including the burdens of Sprint Corp. and other companies under the SoftBank umbrella.

The cost to insure its bonds against nonpayment using credit default swaps is one of the highest among Japanese companies, at 224 basis points, according to CMA data.

Another risk, analysts say, is what SoftBank does with the ¥2.35 trillion in cash from the telecom IPO that’s helping suppress its loan-to-value ratio. Founder and Chief Executive Officer Masayoshi Son has said a second Vision Fund would certainly come, although some analysts are becoming less sure of that.

“If there is a Vision Fund II, and if it’s a similar size to the first one, it will be a big financial burden,” SMBC Nikko’s Harada wrote in his report. “The potential size and timing of the launch will be watched carefully.”