See Who Gets Exposed When You Pull the WeWork Thread

(Bloomberg Opinion) -- In Japan, Masayoshi Son is revered. So much so that banks line up to fund his spending sprees, even though lending to SoftBank Group Corp. is already pushing their limits. But the $9.5 billion bailout package Son has put together for WeWork may have been the last straw. 

There are already signs of trouble. Part of that rescue was supposed to be a $3 billion tender offer for WeWork stock, which SoftBank is now trying to shrink without much success. Part of the thinking was to limit the payout WeWork founder Adam Neumann gets, as resentment builds among employees who are facing massive job cuts, Bloomberg News reported last week. 

Yet it’s equally possible that SoftBank is having a tough time with financing. Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, is likely to turn down Son’s request for a 300 billion yen ($2.8 billion) loan, the Financial Times reported. 

This is a major turning point for Son. In recent weeks, investors in Mizuho Financial Group Inc., Son’s go-to lender, started to express concern over the company’s exposure to SoftBank. The megabank is planning to invest in Son’s second Vision Fund, and provide financing for the latest funding round for Oyo Hotels and Homes, another unicorn backed by Son. That money will help Ritesh Agarwal, the 26-year old founder of the Indian hotel chain, buy out earlier investors at an astronomical $10 billion valuation. 

Investors have good reasons to worry. In its current form, SoftBank is becoming too indebted for Japan’s comfort. The holding company, excluding distressed subsidiaries such as Sprint Corp., had amassed 4.5 trillion yen of interest-bearing net debt, or 12.5% of Japan’s three megabanks’ Tier-1 capital as of September. With 1.4 trillion yen in bank loans outstanding, SoftBank is a big client. Normally, banks wouldn’t want their loan books to be so concentrated; otherwise, one bad borrower can bring down the whole system.

As I’ve written, SoftBank is no cash cow. Subsidiaries from Sprint to British chipmaker ARM Holdings Inc. don’t put much on the table, so SoftBank has to live off the cash on hand, borrow even more, or sell its investments. So far, the company has been running like a well-oiled machine. In the September quarter, SoftBank took out a $3.8 billion margin loan backed by its shares in Alibaba Group Holding Ltd. to repay 250 billion yen of bank loans. It also collected $6.4 billion after selling stakes in China’s ride-hailing unicorn Didi Chuxing Inc. to the Vision Fund. As Son’s aura fades, however, he could struggle to form a second Vision Fund, and this important financing channel will disappear.

Then there’s WeWork, which takes cash-flow management to a whole new level. The loss-making unicorn has whopping $47 billion lease liabilities looming — and that doesn’t even factor in the $9.5 billion bailout. How SoftBank greases this one through is anyone's guess.

Eager to earn fees and net interest margins, Japan’s bankers could look the other way if Son goes for another telecom operator or dabbles in KPMG LLP’s Mayfair private club. At least these deals involve factories, machinery, or real estate, which you can claw back if loans go sour. What kind of collateral can WeWork provide? Pretty decorations from their leased properties?

Of course, Son can pretend that, like Sprint or the Vision Fund, WeWork is another “self-financing” entity. He could argue that the 300 billion yen loan is for SoftBank, not WeWork. But bankers are no fools. Once the loans are distributed, they have no control over how they will be spent. 

In Hindu mythology, there’s a lion whose appetite was so voracious that he ate his legs, torso and everything else up to his lower jaw, so only huge fangs and a gaping mouth remained. WeWork, I’m afraid, may well be SoftBank’s last bite. 

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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