Billionaire Son Matching Facebook Ends Risk Drop: Japan Credit

A four-week decline in SoftBank Corp.’s bond risk is ending on concern billionaire founder Masayoshi Son will take on more debt to follow Facebook Inc. and Rakuten Inc.’s investments in mobile-messaging services.

The cost to insure against nonpayment by Japan’s third-largest wireless carrier climbed 7 basis points this week to 185, even as Japanese and U.S. benchmarks were little changed, according to data provider CMA. The contracts, which dropped 47 basis points in the previous four weeks as concern eased that Son would acquire T-Mobile US Inc., started rising after people familiar said SoftBank is seeking to buy a stake in Line Corp.

Son’s $47 billion acquisition spree since October 2012, when he announced the purchase of Sprint Corp., has doubled the company’s interest-bearing debt from the end of last fiscal year to 9.2 trillion yen ($90 billion). Line, a South Korean-controlled messaging service with 370 million users, is worth as much as $14.9 billion, according to BNP Paribas SA. Facebook is buying WhatsApp Inc. for as much as $19 billion, while Rakuten agreed to pay $900 million for rival Viber.

“It’s true that investing in growth is very important, but bond holders are beginning to think that’s overdoing it,” said Mana Nakazora, the chief credit analyst at BNP Paribas in Tokyo. “The default-swaps reaction shows that investors really don’t want to see a further worsening in the company’s financials.”

Eyeing Line

Son has held talks with Line about a purchase, one person said, asking not to be identified as the information is private. Line has received at least one other offer for all or some of the company, prompting it to slow preparations for an initial public offering, said two of the people.

Line’s Chief Operating Officer Takeshi Idezawa said SoftBank hasn’t offered to buy a stake. SoftBank’s Tokyo-based spokeswoman Mariko Osada declined to comment on the default-swaps moves and acquisition plans.

SoftBank’s bond risk climbed to a one-year high at 227 basis points last month on concern the company, which paid $21.6 billion for Sprint last year, will extend its U.S. push to a takeover of T-Mobile US. The contracts have declined since as Federal Communications Commission Chairman Tom Wheeler expressed skepticism about the deal.

Acquisition Spree

The Tokyo-based company has been acquiring stakes in providers of content including China’s Wandoujia and Finnish game maker Supercell Oy. It is also the largest shareholder in GungHo Online Entertainment Inc., the maker of games including “Puzzle & Dragons,” and Yahoo Japan Corp., which operates the nation’s most-visited Web portal.

Buying a provider of services that rely on Internet access to let users send messages or make calls for free makes operational sense for SoftBank as such applications displace traditional text-messaging offered by wireless carriers, according to Yoshihiro Nakatani, a Tokyo-based senior fund manager at Asahi Life Asset Management Co.

“Having Line in the business portfolio would be good strategy,” Nakatani said. “SoftBank could pipe GungHo and Supercell content to Line users.”

500 Million

Line topped 10 million users in the U.S. and may reach a total of 500 million by year’s end, COO Idezawa said at a briefing in Tokyo on Feb. 26. The Tokyo-based company generated about 34.3 billion yen in revenue last year from its core business by selling games and stickers -- cartoons or illustrations that users can send to friends, it said this month.

SoftBank, with almost 35 million subscribers in Japan, had a net income of 93.3 billion yen in the three months ended Dec. 31 on 1.96 trillion yen in revenue. Its outstanding bonds totaled 4.82 trillion yen after the company sold 820 billion yen in domestic notes last year, almost 10 percent of all corporates offered in the market in 2013, according to data compiled by Bloomberg.

“Unlike Sprint, it’s not quite clear how Line will generate cash flow,” Nakatani said. “Investors are worried that the Line acquisition will lead to more borrowing, making the company more vulnerable to” unforeseen stress, he said.

The yield premium on SoftBank’s 1.689 percent notes sold in November rose to as high as 178 basis points last month, from 128 at the time of issue. The spread was at 166 on yesterday. Japan’s benchmark 10-year yield was at 0.59 percent and the yen traded at 101.92 per dollar as of 11:17 a.m. in Tokyo. A basis point is 0.01 percentage point.

Downgrade Risk

SoftBank, which was cut to junk by Moody’s Investors Service and Standard & Poor’s in July after purchasing Sprint, is rated A- by Japan Credit Rating Agency Ltd., its fourth-lowest investment grade score. The Line acquisition would increase the risk of another downgrade, BNP Paribas’ Nakazora said.

“Bond investors don’t think the company has all that much room to play in its finances and expect to see some profit-generation pretty soon,” said Nakazora. “Stock markets may welcome the upside from risk-taking, but a credit perspective would rather not see them buying more.”

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