SoftBank Group Corp’s move to sell assets and reduce its $109bn in total debt has some bondholders wary of the risk founder Masayoshi Son will use the cash for another acquisition.
The mobile phone and Internet group said on Thursday it will sell $8.9bn of its stake in Chinese e-commerce company Alibaba Group Holding to boost cash and reduce liabilities. Yesterday it increased that amount to $10bn. While SoftBank’s 2020 dollar bonds have rallied to a three-year high and its bond risk more than halved in the past four months, it still has about 0.4% chance of non-payment in the coming year, based on the Bloomberg Default-Risk Model.
“If SoftBank is turning unrealized share profits into cash to bolster financial strength, it’s positive,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co in Tokyo. “But this is Son, so the worry is he is thinking of another investment.”
SoftBank’s decision to sell the Alibaba stake is part of a broader plan to strengthen its balance sheet that will probably include further asset sales, a person familiar with the matter said. The Japanese wireless carrier’s total debt soared 5.6 times in the last four years following its purchase of Sprint Corp, which has suffered seven straight years of losses and has $10bn of liabilities coming due in the next three years.
Hiroe Kotera, a spokeswoman for SoftBank in Tokyo, reiterated that proceeds from the deal will be used for the repayment of interest-bearing debt as well as other general corporate purposes, declining to comment further.
Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan, which holds SoftBank bonds, said he wants to see Son’s company focus on fixing Sprint now rather than getting distracted by other niche businesses.
“They can’t keep pushing up their debt all the time, so I’d like to see them use the unrealized share profits they have to rebuild their finances,” said Matsukawa. “It seems like SoftBank is finally looking to improve its financial affairs.”
SoftBank President Nikesh Arora is leading the move to re- examine the company’s portfolio, and he said on a call that proceeds will not be used to acquire assets of Yahoo. The Nikkei newspaper said on Thursday that SoftBank may use the funds to buy additional shares in Yahoo Japan Corp, in which both firms hold stakes.
The transaction will reduce SoftBank’s ratio of net debt to earnings before interest, taxes, depreciation and amortisation to 3.3 times, from 3.8 at the end of March, according to the firm and based on Thursday’s plan to raise $8.9bn. A lower number means that a company is better positioned to pay down its debt.
Moody’s Investors Service said on Wednesday that SoftBank’s Ba1 rank, its highest speculative-grade rating, won’t be affected by the share sale, and that the company will need to cut its debt further to be considered for an upgrade.
The cost to insure SoftBank’s debt fell to 156 basis points on Thursday, the lowest in nine months, and down from 410 basis points in February when global debt markets turned risk adverse. The company’s probability of debt non-payment within 12 months has risen to 0.444% from about 0.16% a year earlier, according to the Bloomberg Default-Risk Model, which considers factors such as share prices and debt. The gauge suggests the lowest investment level now for the firm. The comparable default risk at NTT Docomo is 0.028%.
SoftBank’s 4.5% dollar bonds due April 2020 rose to 103.84 yesterday, the highest since May 2013, according to Bloomberg-compiled prices.
“Without knowing exactly what SoftBank is going to use this money for, it’s difficult to make an accurate assessment of this deal,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA, who recommends buying the company’s debt.
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