SoftBank Risk Jumps as Son to Battle for T-Mobile: Japan Credit

SoftBank Corp. (9984)’s bond risk jumped on signs billionaire founder Masayoshi Son is readying a long fight to win regulatory approval for the takeover of T-Mobile US Inc.

The cost to protect debt of Japan’s fastest-growing wireless carrier surged 10 basis points on July 14 to 195, the highest since Feb. 10, according to CMA prices. The Markit iTraxx Japan credit-default swap index was little changed at 64.16 basis points that day. SoftBank’s bond risk is about double the 99 basis-point average for global peers.

Son needs banks to extend financing for longer than usual because an expected T-Mobile regulatory review could last a year or more, causing lenders to seek higher fees, people with knowledge of the matter said. Prospects that a successful bid will boost U.S. earnings have supported the stock, limited the bond risk jump and reduced SoftBank’s probability of delinquency to a six-month low, according to Bloomberg’s default-risk model.

“SoftBank should really hold off on signing the deal until it’s sure all the lobbying will win it approval,” said Yusuke Ueda, a credit analyst at Bank of America Merrill Lynch in Tokyo. “If it succeeds, its leverage will rise and its credit ratings will probably be cut, though from an equity perspective, a deal would be positive in the mid- to long-term.”

Photographer: Tomohiro Ohsumi/Bloomberg

Masayoshi Son, chairman and chief executive officer of SoftBank Corp., speaks while standing next to humanoid robot Pepper, developed by SoftBank's Aldebaran Robotics unit, at SoftBank World 2014 in Tokyo, Japan, on Tuesday, July 15, 2014. Close

Masayoshi Son, chairman and chief executive officer of SoftBank Corp., speaks while... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Masayoshi Son, chairman and chief executive officer of SoftBank Corp., speaks while standing next to humanoid robot Pepper, developed by SoftBank's Aldebaran Robotics unit, at SoftBank World 2014 in Tokyo, Japan, on Tuesday, July 15, 2014.

Google Hire

SoftBank said today it hired Google Inc.’s Nikesh Arora to help steer its global expansion. Arora will join as vice chairman in October after nearly a decade at Google, including time as chief business officer and head of European operations, the Japanese company said in a statement.

Sprint Corp. (S), controlled by SoftBank, is planning to acquire T-Mobile for about $32 billion, people familiar said. The companies, including T-Mobile shareholder Deutsche Telekom AG, expect the Federal Communications Commission and the Department of Justice to take at least a year to evaluate the deal, the people said, asking not to be identified discussing private information.

Regulators insist they want to preserve four competitors in the U.S. wireless marketplace, where Sprint and T-Mobile are No. 3 and No. 4.

Even if the merger is successful, the work needed to achieve synergies will be “complex and costly,” and the new company will be at a disadvantage to competitors AT&T Inc. and Verizon Communications Inc. for many years, Moody’s Investors Service wrote in a report dated June 16.

Credit Rating

The combined firm could carry as much as $75 billion of debt and a credit rating of Ba3 or lower, according to Moody’s. Sprint is now ranked at Ba3, three levels below investment grade, while SoftBank is evaluated at Ba1, two steps higher.

SoftBank’s bond risk may come back down because the new developments on its T-Mobile bid aren’t surprising, said Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan Co. He said the company’s notes haven’t moved on the reports.

“It’s better for Sprint to team up with T-Mobile rather than go it alone,” said Matsukawa. “The industry will stabilize if it goes from four to three companies, and you could say that that’s credit positive.”

Takeaki Nukii, a SoftBank spokesman in Tokyo, declined to comment on the credit-default swap moves.

Bond Spread

The extra yield on the Tokyo-based company’s 1.689 percent notes due in 2020 was at 129 basis points over sovereign debt compared with as high as 178 in January, according to Bloomberg-compiled data. A basis point is 0.01 percentage point.

Japan’s benchmark 10-year bond yield touched 0.51 percent today, the lowest since April 2013, as the Bank of Japan buys about 7 trillion yen ($69 billion) of sovereign debt a month to spur inflation. The yen has risen 4 percent against the dollar this year to 101.22 as of 10:05 a.m. in Tokyo, after tumbling 18 percent in 2013.

SoftBank’s probability of default in the next year has dropped to 0.31 percent from 0.47 percent in May, according to the Bloomberg default-risk model, which considers factors such as the share price, debt levels and interest expenses. That reading suggests SoftBank carries a similar level of risk as companies scored at the lowest investment grade, such as Sony Corp. and Daiwa Securities Group Inc., according to the data.

The Japanese carrier’s shares have rebounded 12 percent to 7,581 yen today from this year’s closing low of 6,766 yen on May 19. Even so, the ratio of debt to equity climbed to 321 from about 203 a year ago, the data show.

Mobile Users

Sprint and T-Mobile had a combined 103 million users in 2012, matching the figure for Verizon and compared with 110 million for AT&T, according to company releases. In Japan, SoftBank added 649,500 net users in March, more than NTT Docomo Inc. and KDDI Corp., according to the companies’ latest data.

Son has said that as technology converges, a new market for Internet services is emerging in which AT&T, Verizon and Comcast Corp. are the three giants. He views a combined Sprint and T-Mobile as a counterweight, able to offer wireless high-speed Internet to compete with phone and cable modems.

SoftBank would be able to benefit from economies of scale if the T-Mobile takeover succeeds, and it would be able to cut costs by combining base stations for mobile phones, according to Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co.

“Even if the acquisition increases its financial burden, that’s fine if it makes up for it with revenue later,” Kawasaki said. “Increasing subscribers is key in boosting revenue.”

To contact the reporters on this story: Takashi Amano in Tokyo at tamano6@bloomberg.net; Cheng Leng in Tokyo at cleng3@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net Ken McCallum, Pavel Alpeyev

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