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SoftBank's US$120b debt nears Moody's downgrade trigger

Monday, September 5, 2016 - 11:35
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SoftBank Group Corp's debt - which is set to swell as its latest global acquisition becomes effective on Monday - is nearing a level at which Moody's Investors Service has said it will consider a rating downgrade.

[TOKYO] SoftBank Group Corp's debt - which is set to swell as its latest global acquisition becomes effective on Monday - is nearing a level at which Moody's Investors Service has said it will consider a rating downgrade.

The Japanese wireless carrier's purchase of British semiconductor designer ARM Holdings Plc for about US$32 billion looks set to add to group debt, which at US$115 billion on Mar 31 is five times its adjusted earnings, according to Moody's.

The rating company says any sustained climb above 5.5 times could be a "downward trigger" on its evaluation.

"I'd expect it will go up higher than our expectations, so that reflects relatively negatively on overall credit," Motoki Yanase, an analyst at Moody's in Tokyo, said in an interview.

While exceeding the trigger doesn't result in an immediate ratings downgrade, if sustained, it increases the chances of one and Moody's will have to watch to see how SoftBank can "deleverage over the next few years," Ms Yanase said.

SoftBank will issue at least 350 billion yen (S$4.63 billion) in subordinated bonds to mainly individuals this month, and is marketing additional tranches of debt to institutional investors as it faces about 1.7 trillion yen in bond redemptions to the end of 2018.

While the company's share price is rallying and the cost of insuring its bonds from non-payment is falling, the Bloomberg Default-Risk Model signals deterioration in the firm's creditworthiness this year.

Hiroe Kotera, a spokeswoman for SoftBank in Tokyo, declined to comment.

SoftBank's share price has climbed 14 per cent since the start of the year, and the cost to insure against a default on its bonds has almost halved to 132.5 basis points in the same period.

Even so, the risk of non-payment in the coming 12 months has risen to 0.5 per cent from about 0.3 per cent at the start of the year, according to the Bloomberg default risk model, which tracks metrics including share price, debt and cash flow. Its borrowings stood at the equivalent of about US$120 billion as of June 30.

Moody's has a Ba1 rating on SoftBank, its highest speculative grade, and a B3 rating on its US subsidiary Sprint Corp, five levels lower. The Japanese company is selling hybrid bonds this month with maturities of 25 years or longer that are callable.

The company plans to price 27-year bonds at a yield of 3.4 per cent to 3.6 per cent on Sept 9, according to a statement from SoftBank last month.

Japan Credit Rating Agency Ltd and S&P Global Ratings said last month they will count 50 per cent of the bond sales toward equity, and the issuance supports their respective ratings of Tokyo-based SoftBank.

Moody's Ms Yanase said there is a "very high hurdle" for it to count the deal as having any equity content, as it doesn't provide such partial credits to company rated at non-investment grade.

Makiko Yoshimura, an analyst at S&P in Tokyo, said in an interview that she expects SoftBank's debt-to-earnings before interest, taxes and depreciation and amortisation to improve because of the hybrid debt sale.

JCR reaffirmed SoftBank's rating at A- last month, citing factors including an improvement in earnings at Sprint, the strength of SoftBank's domestic telecommunications business, and the hybrid securities.

"Although it is good to have lower-ranked securities in the capital structure, it is going to be a part of total debt anyway," said Moody's Ms Yanase. "It is going to increase the total leverage so that is certainly credit negative."

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