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SoftBank US$6.9b value drop spurs biggest Japan risk jump

SoftBank Group bond risk rose the most in Japan as a US$6.9 billion drop in market value in a week eroded confidence in founder Masayoshi Son's debt-fueled expansion.

[TOKYO] SoftBank Group bond risk rose the most in Japan as a US$6.9 billion drop in market value in a week eroded confidence in founder Masayoshi Son's debt-fueled expansion.

The cost to insure SoftBank notes against nonpayment jumped 24.5 basis points since Aug 19 to 185, after a global selloff that erased more than US$8 trillion from equity values, according to CMA prices. The Markit iTraxx Japan credit-default swap index climbed six basis points during the period.

"The biggest reason for its weakness is it's been issuing too many bonds," said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. "One of the positives of this company is that it has unrealised gains on investments, and those gains decreasing due to the market turmoil is also leading to selling." SoftBank issued the most corporate bonds in Japan last year and has the biggest amount of outstanding debt for a non- financial company in the nation after Toyota Motor. Unrealised gains on stock holdings at Mr Son's company have tumbled 22 per cent in the past three months to about US$65 billion as investments including its stake in Alibaba Group Holding plunge in value, putting pressure on its balance sheet.

The market capitalisation of the Tokyo-based wireless carrier was 8.35 trillion yen (S$96.5 billion) on Thursday, compared with 9.18 trillion yen a week earlier.

Mr Son's net worth dropped about US$600 million to US$11.8 billion as of Wednesday compared with Aug 20, according to the Bloomberg Billionaires Index.

SoftBank's net income of 213.4 billion yen in the three months ended June 30 beat analyst estimates as domestic profits climbed. Sprint Corp, the US carrier that the company bought for US$22 billion in 2013, posted a net loss of US$20 million in the quarter.

"The market's consensus is that there won't be a big improvement or a sale of Sprint right away," said Hidetoshi Ohashi, the chief executive office of Japan Credit Advisory in Tokyo. "SoftBank's domestic business is stable." Hiroe Kotera, a SoftBank spokeswoman, declined to comment on market moves.

SoftBank issued 1.1 trillion yen of bonds last year, all to individual investors rather than institutions. It had 11.5 trillion yen in debt, exceeded only by Toyota's 19.7 trillion yen among non-financial companies, according to data compiled by Bloomberg.

"SoftBank's thinking is it will raise money from institutional investors if it can, but right now, it's basically getting funds from individuals," said Kentaro Harada, an analyst at SMBC Nikko Securities in Tokyo. "Because its spreads and yields are at attractive levels in absolute terms, there's no impact" on fundraising, he said.

The extra yield on the company's 1.36 per cent bonds due in June 2020 was 124 basis points more than sovereign notes. The average spread on Japanese corporate debt was 24 basis points, according to Bank of America Merrill Lynch index data.

Japanese companies with lower credit ratings have seen their bond risk rise the most in a jittery market.

SoftBank has a Ba1 grade from Moody's Investors Service, and a BB+ score from Standard & Poor's, both the highest non- investment rating. Nippon Paper Industries, whose debt risk rose the most in a week after SoftBank, has an A- score with a negative outlook from Japan's Rating & Investment Information Inc., four levels above junk.

SoftBank's probability of debt non-payment within one year has climbed to 0.172 per cent from about 0.143 per cent on Aug 20, according to the Bloomberg default-risk model, which considers factors such as share prices and debt. The gauge suggests the company's credit score would be more appropriate at the second-lowest investment grade, two steps lower than its score from Japan Credit Rating Agency now.

"When risk aversion in Japan increases, bonds with low ratings tend to see their spreads widen," said Mr Nakazora of BNP Paribas. "Probably the biggest reason that SoftBank's bond risk moved is because its credit rating is low."