SoftBank's plans raises doubts on $33-billion bond gurantees

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 Corp., worsening the quality of its credit.

The mobile division SoftBank Corp. 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 percent 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 Inc.

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 6 percent dollar-denominated perceptual bonds have risen 27 basis points to 398 since Son unveiled the IPO plan on Feb. 7, according to Bloomberg-compiled data. Credit-default-swap protection costs against debt non-payment 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 percent of its 1.15 trillion yen in operating profit in the nine months ended Dec. 31, 2017, according to company data. The firm’s market capitalization has lagged below the value of its assets. Spinning off the mobile phone unit may help close that gap, while raising capital.

SoftBank’s bond prospectuses suggest that the company can cancel the guarantees without getting explicit approval from bondholders, according to Toshihiro Uomoto, the chief credit strategist at Nomura. For example, if lenders of a syndicated loan to the firm agree to get rid of their own guarantee from the mobile unit, the guarantee on yen notes will be canceled too, he said.

Debt holders could still count on funds from more than 17 trillion yen in stock investments held by SoftBank if the guarantees are removed, so any gains in yield premiums may be limited, Uomoto said.

In theory SoftBank should also be able to redeem all of those notes if it could raise enough money by issuing new debt with no such guarantees, said Akihisa Motonishi, a JCR analyst. Still, those investors who have considered the guarantees important might demand “additional premiums,” such as higher coupons, for holding the new securities, he said.

JCR has no intention to lower its score for SoftBank bonds from A-, four levels above junk, even if the firm removed their guarantees, Motonishi said. The rating depends more on how much of the telecom division Son sells and the impact that could have on the group’s operations and earnings, he said. JCR’s issuer rating for SoftBank Group is also A-.

If SoftBank opted to open talks with bond investors to gain their consent, the focus would be on what it could offer in return.

Or it could introduce a framework different from guarantees that would ensure debt payments, Asahi Life Asset’s Nakatani said. But many of SoftBank’s securities are likely held by individuals, rather than a limited number of institutional investors, so getting approval through negotiations could pose a challenge for SoftBank, Nakatani said.