SoftBank Is Japan’s HNA. That’s Good

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(Bloomberg) -- Many companies would shy from being lumped alongside indebted Chinese investment groups such as Fosun International Ltd. and HNA Group Co. It’s a comparison that Japan’s SoftBank Group Corp. should welcome.

Masayoshi Son’s company is trying to shed its image as a telecom operator. SoftBank’s U.S. carrier Sprint Corp. has agreed to merge with competitor T-Mobile US Inc., leaving the Japanese parent with only a 27 percent stake in the combined firm (Masa had insisted on control in earlier talks). Meanwhile, SoftBank is preparing to list its Japanese wireless unit. That’s come at a cost: To pave the way for the flotation, SoftBank had to alienate Asian private banks that enthusiastically bought into its dollar bond offerings in 2017.

These maneuvers won’t fundamentally alter SoftBank’s debt profile. The Japanese mobile business will still be consolidated, given that most companies don’t float more than 20 percent of their shares in IPOs. And equity-accounting for its stake in Sprint won’t help SoftBank’s leverage ratios: The U.S. company’s total debt is 4.6 times Ebitda, lower than SoftBank’s 5.8 times, Moody’s Investors Service estimates.

It’s perception that matters, though, and if investors and rating companies start to look at SoftBank as more of an investment firm than a telco, that would be to the Japanese firm’s advantage. 

Currently, SoftBank is still classified by Moody’s as a telecom operator, a category that’s evaluated according to strict leverage measures such as the total-debt-to-Ebitda multiple. 

If SoftBank were classed as an investment holding company, its $130 billion of interest-bearing debt would be judged against the market value of its portfolio. The firm’s listed holdings alone are worth more than $160 billion. To that we can add $80 billion of stakes purchased over the past three years in companies from Uber Technologies Inc. to ARM Holdings Plc; those are probably worth considerably more now.

If Sprint’s merger with T-Mobile goes through, the market-value-based leverage ratio will be “an increasingly important metric for SoftBank,” Moody’s noted. In other words, it may reclassify, or even upgrade, the Tokyo-based technology investor.

For acquisitive globetrotters, being labeled an investment firm means having a lot more room to issue debt. In January, Fosun was upgraded one level by Moody’s, which didn’t seem at all concerned by the Shanghai-based company's debt pile. It noted only that Fosun had no liquidity issues considering it held 61 billion yuan ($9.6 billion) of cash and marketable securities against 35 billion yuan of short-term liabilities.

As SoftBank becomes an investment company, leverage is no longer an appropriate measure, CFO Yoshimitsu Goto was cited as saying in a cover story in the Nikkei Asian Review last weekend. SoftBank’s Vision Fund and Delta Fund mean the firm can use debt without damaging its balance sheet, he said.

In effect, SoftBank has already started to resemble the likes of HNA, using complex instruments and margin loans backed by its shares in Alibaba Group Holding Ltd. to finance more startup acquisitions.

But here’s the caveat: To be a true investment company, SoftBank needs to show it can also exit. As Moody’s said of Fosun: It has “the ability to recycle its investments.” Never mind that the conglomerate may have been forced by Beijing to sell overseas assets last year — the point is that it could and did. 

Masa, on the other hand, doesn’t have much of a track record on this front.

China’s biggest investment houses have acquired notoriety for their accumulation of debt; ironically, they’ve also become a model for SoftBank.

©2018 Bloomberg L.P.

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