Ratings Downgrade? SoftBank's Son Can Sleep Easy

The company's borrowing costs have already risen.

If ever there was a company that needn't worry about a credit-rating downgrade it would be a junk-scored Japanese one.

Enter SoftBank.

After increasing its total debt sixfold in five years, the owner of stakes in Alibaba and Yahoo is nearing a level that could prompt Moody's to lower it deeper into speculative territory from its current Ba1 standing, Bloomberg News reported Monday. Founder Masayoshi Son is unlikely to lose much sleep.

For starters, markets have already effectively downgraded SoftBank's debt. Implied yields on SoftBank's 10-year notes have risen 54 basis points over the past 12 months, even as the return on similar maturity Japanese government bonds fell 41 basis points and Treasuries dropped 52 basis points.

Curve Ball

SoftBank's yield curve shows the company's borrowing costs have already widened since last year

Source: Bloomberg

That increase in borrowing costs is also greater than what companies usually pay when they move to Ba2 from Ba1. The average difference in global spread between those two levels for outstanding 10-year debt is currently seven basis points. Of course, for a company that's about to add to an existing $120 billion debt pile via a $32 billion acquisition, every basis point counts. But sometimes it's even cheaper for Ba2-rated companies to raise money than it is for Ba1 ones:

Mood Swings

A downgrade from Ba1 to Ba2 doesn't necessarily mean a big hike in debt costs

Source: Bloomberg

Note: Data show benchmark spread at issue for 10-year bonds at Moody's rating in year cited.

SoftBank also has the benefit of geography. In Japan, where interest rates are negative and there are very few high-yield issuers, capital markets will probably continue to welcome the company with open arms.

Ups and Downs

Yields on SoftBank five-year debt have swung wildly over the past few years

Source: Bloomberg

Finally, ratings firms are notoriously slow moving. Moody's has a stable outlook for SoftBank and would typically have to first revise that to negative before any downgrade. It also takes about 18 months to review a company's credit score. By that point, Son could easily have sold some assets and reduced debt.

SoftBank's deteriorating creditworthiness may be making headlines but it's unlikely to keep Son from a good night's sleep.

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

    To contact the authors of this story:
    Christopher Langner in Singapore at clangner@bloomberg.net
    Tim Culpan in Taipei at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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