Markets

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Masayoshi Son has found a new breed of believers: yield-hungry Asian investors.

SoftBank Group Corp. has already issued $7.9 billion of dollar-denominated bonds this year, but there's a key difference versus other offerings.

Flood the Zone
SoftBank has issued $7.9 billion of dollar bonds this year
Source: Bloomberg

These notes are unique in that they cater specifically to Asian investors. The Japanese technology conglomerate's $4.5 billion of perpetual securities, sold in July, are registered in Singapore and classed as Reg S, meaning SoftBank couldn't market them to money managers in the U.S. In 2013, when SoftBank first tapped the dollar bond market, its $2.5 billion issue was 144A.

SoftBank's two lots of perpetual bonds, which pay a coupon of 6 percent and 6.875 percent, also include an interest deferral option. Their prospectus states that SoftBank may:

"at its discretion, elect to defer all or part of any interest payment which is otherwise scheduled to be paid on an interest payment date by giving a deferral notice of such election to the holders, the trustee and the principal paying agent. If the company elects not to make all or part of any interest payment on an interest payment date, then it will not have any obligation to pay such interest on the relevant interest payment date and any such nonpayment of interest will not constitute an enforcement event or any other breach of the company’s obligations under the notes or for any other purpose."

That's pretty bold stuff. And while both bonds are callable, one in six years and the other in 10, SoftBank isn't under any obligation to go down that path. In other words, if you buy these securities, you're prepared to allow SoftBank to roll over the $4.5 billion indefinitely without paying a cent of interest in the meantime.

Asian investors weren't deterred. Since their sale, both notes have gained in value, pushing yields down to 5.7 percent and 6.4 percent.

Money managers' seeming lack of concern is understandable. Country Garden Holdings Co.'s $350 million of 5.625 percent 2026 bonds are yielding 4.89 percent. Surely SoftBank, the world's 38th-largest company by assets, is more creditworthy? Country Garden, a junk-rated Chinese developer, can lose 10 percent of its value in a day on news of home-sale curbs. SoftBank's net asset value is a lot more transparent, and is updated daily on the company's website.

SoftBank could get cheaper funding at home, thanks to the Bank of Japan's negative interest rate policy. On average, SoftBank pays only 2.1 percent interest on its yen-denominated bonds, and bank loans are even less expensive.

The problem is, SoftBank is becoming too big for Japan. Excluding Sprint Corp., it's already amassed $88 billion in net debt. That's equivalent to almost 30 percent of the Tier 1 capital ratios at Japan's three megabanks. Lenders aren't willing to expose nearly so much of themselves to one customer.

Big in Japan
SoftBank's net debt is equivalent to almost 30 percent of the Tier 1 capital ratios at Japan's three megabanks
Source: Bloomberg

And like China, Japan's corporate bond market is comparatively underdeveloped, accounting for 14.6 percent of GDP, according to Asian Development Bank data. Meanwhile, SoftBank has picked up the pace of spending.

Dwindling
Yen-denominated bonds account for less than 15 percent of Japan's GDP
Source: Asian Development Bank

As my Gadfly colleague Nisha Gopalan wrote last week, SoftBank's $100 billion Vision Fund houses a growing number of former Deutsche Bank AG traders. Perhaps they can help SoftBank market more debt instruments across Asia?

Whatever the case, Son needs to tread carefully. Right now, he's revered, particularly in China, where high-net-worth individuals are willing to overlook onerous bond clauses. But add too much financial engineering into the mix, and those attitudes could change, putting SoftBank at a distinct debt disadvantage.

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

  1. 144A is a private placement in the U.S. for U.S. investors. A Reg S bond is one issued in the Eurobond market for international investors.

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

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