SoftBank's IPO plan raises doubts on US$33b bond guarantees

[TOKYO] Billionaire Masayoshi Son's plan to list his cash-cow Japanese telecom business is raising concern among observers that the company might stop guaranteeing the debt of its parent SoftBank Group Corp, worsening the quality of its credit.

The mobile division SoftBank Corp assures payments to investors on US$33.4 billion in bonds of its parent, which is rated junk by Moody's Investors Service and S&P Global Ratings, according to Bloomberg-compiled data. The unit needs to prove its independence to get listed on the Tokyo Stock Exchange, meaning that it probably would have to cancel the guarantees to pass the test, according to Japan Credit Rating Agency and Asahi Life Asset Management.

"It's the mobile company that's generating cash flows, so its guarantees have been a source of a very strong sense of assurance" for bond investors, said Yoshihiro Nakatani, senior fund manager at Asahi Life Asset.

"It would be a problem morally" if it cancelled them without negotiating with investors, he said.

The focus on SoftBank's bond guarantees highlights how the market remains concerned about the broader company's huge debt that it's accumulated making investments around the globe. The firm's total debt has climbed 28 per cent in two years to 15.8 trillion yen (S$195 billion) at the end of last year, and its bond-default risk is among the highest in Japan. SoftBank's yield premiums would likely rise if it got rid of its guarantees without introducing any new form of assurance, according to Nomura Holdings Inc.

In news conferences and analyst meetings, SoftBank hasn't made clear its plans for the guarantees. SoftBank spokesman Mitsuhiro Kurano declined to comment.

SoftBank's domestic telecom operations accounted for about 53 per cent of its 1.15 trillion yen in operating profit in the nine months ended Dec 31, 2017, according to company data. The firm's market capitalisation has lagged below the value of its assets. Spinning off the mobile phone unit may help close that gap, while raising capital.

SoftBank's bond prospectuses suggest that the company can cancel the guarantees without getting explicit approval from bondholders, according to Toshihiro Uomoto, the chief credit strategist at Nomura. For example, if lenders of a syndicated loan to the firm agree to get rid of their own guarantee from the mobile unit, the guarantee on yen notes will be cancelled too, he said.

Debt holders could still count on funds from more than 17 trillion yen in stock investments held by SoftBank if the guarantees are removed, so any gains in yield premiums may be limited, Mr Uomoto said.

If SoftBank opted instead to open talks with bond investors to gain their consent, the focus would be on what it could offer in return.

The firm could increase coupon payments on outstanding securities, said Akihisa Motonishi, a JCR analyst.

Or it could introduce a framework different from guarantees that would ensure debt payments, Asahi Life Asset's Mr Nakatani said. But many of SoftBank's securities are likely held by individuals, rather than a limited number of institutional investors, so getting approval through negotiations could pose a challenge for SoftBank, Mr Nakatani said.

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