SoftBank Says Leverage Not a Problem. Rating Firms Not Convinced

(Bloomberg) -- Masayoshi Son’s appeal to investors and analysts that SoftBank Group Corp. doesn’t have a debt problem hasn’t convinced the firms that assess its bonds as junk.

While Son has won some converts among the analyst community, SoftBank’s debt-fueled growth strategy is preventing S&P Global Ratings and Moody’s Investors Service from upgrading the company to investment grade, according to analysts at both rating companies. A downgrade to SoftBank’s ratings, now one level below investment grade, is more likely than an upgrade, both say.

SoftBank Says Leverage Not a Problem. Rating Firms Not Convinced

SoftBank listed its Japanese telecom unit last year as Son reshapes the company he founded almost four decades ago into one of the world’s biggest investors in technology startups, with the backing of Saudi Arabian cash. SoftBank is still in its infancy as a holding company, according to the rating companies. It also has $96 billion in net debt at the end of December on a consolidated basis.

“SoftBank’s financial risk profile is significant,” Makiko Yoshimura, S&P’s Tokyo-based director of corporate ratings, said in a phone interview Wednesday. “How they balance their aggressive growth strategy and financial policy will be crucial.”

Son said at SoftBank’s earnings presentation earlier this month that leverage is actually low by one key metric: the loan-to-value ratio, which measures net debt against the value of a holding company’s investments. He put the figure at 14 percent.

Challenging Step

The rating companies calculate Son’s preferred measure as being higher. The difference largely comes down to a higher estimation of net debt, into which the rating companies add such things as commitments to the $100 billion Vision Fund. S&P expects LTV to hover between 30-35 percent over the course of the year. Moody’s expects it to skirt 25 percent.

SoftBank isn’t in a position to comment on how rating companies arrive at their own calculations for LTV, according to Kenichi Yuasa, a spokesman for SoftBank in Tokyo.

“Mr. Son says he intends to monetize the portfolio more actively, but the company has yet to establish a track record of that,” said Motoki Yanase, Tokyo-based vice president and senior credit officer at Moody’s, said in a phone interview Wednesday. “It would be a very challenging step to upgrade this company to investment grade.”

The loan-to-value ratio is the best measure of SoftBank’s creditworthiness, which is relatively high, according to Toshiyasu Ohashi, Daiwa Securities Group Inc.’s Tokyo-based chief credit analyst. Thanks to valuation gains, profits from SoftBank’s Vision Fund and the company’s Delta Fund more than tripled to 176 billion yen ($1.6 billion) in the quarter ended Dec. 31.

While there is merit in measuring net debt-to-equity valuations as an assessment of SoftBank’s leverage, CreditSights analysts led by Mary Pollock questioned in a report this month whether the company is overestimating the value of its holdings. Investors would be better off selectively reducing exposure to SoftBank’s bonds, they said.

“SBG clearly has a knack for adding leverage to maximize returns, but the extent to which it prioritizes risk management is not clear,” the analysts wrote in their report. “This makes us cautious.”

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