SoftBank’s $120 Billion Debt Nears Moody’s Downgrade Trigger

Why Moody's May Be Ready to Pull the Trigger on SoftBank
  • Firm’s purchase of chipmaker ARM becomes effective Sept. 5
  • Mobile carrier leverage is rising more than expected: Moody’s

SoftBank Group Corp.’s debt -- which is set to swell as its latest global acquisition becomes effective on Monday -- is nearing a level at which Moody’s Investors Service has said it will consider a rating downgrade.

The Japanese wireless carrier’s purchase of British semiconductor designer ARM Holdings Plc for about $32 billion looks set to add to group debt, which at $115 billion on March 31 is five times its adjusted earnings, according to Moody’s. The rating company says any sustained climb above 5.5 times could be a “downward trigger” on its evaluation.

“I’d expect it will go up higher than our expectations, so that reflects relatively negatively on overall credit,” Motoki Yanase, an analyst at Moody’s in Tokyo, said in an interview. While exceeding the trigger doesn’t result in an immediate ratings downgrade, if sustained, it increases the chances of one and Moody’s will have to watch to see how SoftBank can “deleverage over the next few years,” Yanase said.

SoftBank will issue at least 350 billion yen ($3.4 billion) in subordinated bonds to mainly individuals this month, and is marketing additional tranches of debt to institutional investors as it faces about 1.7 trillion yen in bond redemptions to the end of 2018. While the company’s share price is rallying and the cost of insuring its bonds from non-payment is falling, the Bloomberg Default-Risk Model signals deterioration in the firm’s creditworthiness this year.

Hiroe Kotera, a spokeswoman for SoftBank in Tokyo, declined to comment.

SoftBank’s share price has climbed 13 percent since the start of the year, and the cost to insure against a default on its bonds has almost halved to 132.5 basis points in the same period. Even so, the risk of non-payment in the coming 12 months has risen to 0.5 percent from about 0.3 percent at the start of the year, according to the Bloomberg default risk model, which tracks metrics including share price, debt and cash flow. Its borrowings stood at the equivalent of about $120 billion as of June 30, before the ARM announcement in July.

Before the announcement of the ARM purchase in July, Moody’s had expected SoftBank’s adjusted debt-to-earnings before interest, taxes and depreciation and amortization ratio would rise slightly from 5 times in March, but stay below 5.5 times, Yanase said.

“With this acquisition and the additional debt that SoftBank will take on, I think it might go beyond 5.5 times toward the end of this fiscal year,” he said. “The downward trigger, we set that at 5.5, but we have to see how SoftBank can deleverage over the next few years and how likely that would be.”

Moody’s has a Ba1 rating on SoftBank, its highest speculative grade, which it affirmed in July, and a B3 rating on its U.S. subsidiary Sprint Corp., five levels lower. The Japanese company is selling hybrid bonds this month with maturities of 25 years or longer that are callable.

The company plans to price 27-year bonds at a yield of 3.4 percent to 3.6 percent on Sept. 9, according to a statement from SoftBank last month.

For more on SoftBank’s purchase of Arm Holdings, click here.

Japan Credit Rating Agency Ltd. and S&P Global Ratings said last month they will count 50 percent of the bond sales toward equity, and the issuance supports their respective ratings of Tokyo-based SoftBank. Moody’s Yanase said there is a “very high hurdle” for it to count the deal as having any equity content, as it doesn’t provide such partial credits to company rated at non-investment grade.

Makiko Yoshimura, an analyst at S&P in Tokyo, said in an interview that she expects SoftBank’s ratio of debt-to-earnings to improve because of the hybrid debt sale. JCR reaffirmed SoftBank’s rating at A- last month, citing factors including an improvement in earnings at Sprint, the strength of SoftBank’s domestic telecommunications business, and the hybrid securities.

“Although it is good to have lower-ranked securities in the capital structure, it is going to be a part of total debt anyway,” said Moody’s Yanase. “It is going to increase the total leverage so that is certainly credit negative.”

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