SoftBank Upgrade Bets Nixed by S&P, Moody’s

  • Company’s default swaps drop to near 11-month low on Monday
  • S&P views SoftBank’s growth strategy as ‘aggressive’

SoftBank Group Corp. is starting to convince markets it can escape a junk debt ranking with its asset-disposal program. Not so fast, say rating companies.

The cost to protect against non-payment by Masayoshi Son’s Internet and mobile phone giant slumped to 150 basis points, down from as high as 410 in February, and less than the 188 it averaged in 2011 when the company had an investment grade from S&P Global Ratings. S&P and Moody’s Investors Service say they need more evidence of a long-term commitment to cutting debt for an upgrade. The Bloomberg default-risk model that assesses share price and credit metrics suggests SoftBank is a borderline case.

“Even if SoftBank raises a lot of money and uses it to reduce its debt temporarily, our focus is on whether it will maintain an improved financial position on a constant basis,” Makiko Yoshimura, an analyst with S&P in Tokyo, said in an interview Monday. “We view SoftBank’s growth strategy and financial policy as aggressive.”

Seeking to reduce an 11.9 trillion yen ($114 billion) debt load, SoftBank will raise $10 billion from selling shares in China’s e-commerce giant Alibaba Group Holding Ltd. and is cutting its investment in game-maker Supercell Oy. The Japanese wireless carrier’s total debt has soared 5.6 times in the past four years following its 2013 purchase of Sprint Corp., which has suffered seven straight years of losses and has $10 billion of liabilities coming due in the next three years.

After Tokyo markets closed on Tuesday, SoftBank President Nikesh Arora stepped down in a surprise departure. Chairman Son said the departure had nothing to do with shareholder criticism of Arora. Son, the billionaire founder of SoftBank, said he wanted to “keep holding on to the rudder more and more as the day of retirement approaches.”

S&P will monitor whether SoftBank maintains its financial discipline after Arora quit because the rating company expected him to strengthen the company in that area, Yoshimura said.

Tencent Holdings Ltd. is buying SoftBank’s majority stake in Supercell for $8.6 billion, according to statement to Hong Kong stock exchange on Tuesday.

The stake sale by SoftBank may be “intended to free up funds for future investments” by the Japanese company, analysts including Chris Ucko at CreditSights Inc. wrote in a report this month.

For a Bloomberg Intelligence primer on SoftBank, click here.

SoftBank had 7.1 trillion yen in unrealized gains on its main listed holdings as of June 21, according to the company’s website. Its own share price has declined 23 percent during the past two years as it has struggled to return Sprint to profitability, while debt servicing costs have increased with short-term borrowings.

That’s pushed up the risk that Son’s company will default on debt in the next 12 months to 0.47 percent from about 0.16 percent a year earlier, according to the Bloomberg default-risk model. The gauge suggests the carrier’s credit rating is at the lowest investment level.

Moody’s said earlier this month while SoftBank locking in unrealized profits is positive for the company’s Ba1 rating, it wants to make sure the carrier uses those proceeds to pay down its debt.

S&P’s view now is that Son’s firm isn’t taking a long-term approach to cutting its debt, according to Yoshimura. The rating company grades SoftBank BB+, one step below investment level and equivalent to Moody’s score.

“Our rating is based on the view that they will continue with acquisitions and growth-focused investments, ” she said. “It is probably going to take a long time for them to build up a track record showing a continuous improvement in their finances.”

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