Idea of the Week: Would You Consider Softbank Group that Yields Over 7%?

Non-investment Segments Remain Stable

With regard to the non-investment segment, income generated from the telecommunications business (including Softbank Corporation, Yahoo! Japan, and ARM etc.) was JPY 5.7 trillion, which rose by 9.3% compared to last year. EBITDA amounted to JPY 1.6 trillion, increased by 3.8% YoY. This signals a stable operating performance.

Softbank Group acquired the semiconductor design company ARM several years ago and planned to sell it to display card giant NVIDIA in 2020. Yet, the deal crashed earlier this year because the Softbank Group failed to get approval from regulatory authorities. Alternatively, Softbank plans to list it on both the UK and US capital markets. As of March 2021, Softbank Group owned about 75% of ARM, which is valued at around USD 60 billion. If the IPO goes smoothly, it would be quite a profit for the Softbank Group.

Turn to Defensive Stance in Investment, Leverage Moves Downward

The interest-bearing debt of Softbank upsizes alongside the equity investment amount, which climbed from USD 14.2 billion in FY2019 to USD 46.6 billion in FY2021. As a result, the LTV ratio (Net debt/Equity value of holdings) is on an upward trend, showing expanding leverage.

However, as mentioned by Masayoshi Son, the CEO of Softbank Group, Softbank Group will turn to a defensive stance in investment selection and shrink the investment amount as the world is entering into chaos, and would also consider investing more in startups with less than USD100 million each, rather than unicorns with over USD 1 billion. Given that most of the major economies have entered the interest rate hike cycle, the environment is less favorable for growth companies. It thus makes sense, for Softbank Group, to tighten investment amounts.

The effect of investment downsizing by Softbank Group is immediately evident, as the LTV ratio has dropped to 15% in the first quarter of FY22, and the current LTV ratio is still way below the upper limit of 35%, suggesting that the leverage ratio is at a healthy level.

Chart 2: Softbank Group’s LTV Ratio

Ample Liquidity and Decent Solvency

Softbank Group's interest-bearing borrowings amounted to JPY 21.4 trillion at the end of June 2022, roughly unchanged from end of March 2022. Short-term borrowings declined from JPY 7.3 trillion to JPY 6.6 trillion, representing an optimization of the debt structure.

Although the Softbank Group experienced huge investment losses, it is important to note that these losses were mainly due to the decline in financial asset prices (Unrealized loss) and did not result in any change in the company's cash flow. Besides, Softbank sold some of its holding with losses, which could offset the tax liability by tax harvest and reduce cash outflows.

As of June 30, 2022, Softbank Group's cash and cash equivalents stood at JPY 6.1 trillion, up significantly from JPY 5.1 trillion at the end of March, but still slightly below the company's short-term debt. Even so, we are still optimistic about the liquidity because invested equity could be a potential source of liquidity. As of June 2022, the net asset value of equity holdings totaled JPY 18.5 trillion; the potential market value might be at JPY 9.2 trillion based on the 50% discount rate, which could be enough to close the funding gap.

It is a common practice of the Softbank Group to monetise holding equity for liquidity. For example, its "JPY 4.5 Trillion Program" in March 2020 disposed JPY 4.5 trillion assets for share repurchase and replenishing liquidity via sales and monetisation of invested equity such as Alibaba, Softbank Corporation, and T-Mobile.

On the other hand, Softbank Group announced its plan on repurchasing JPY 1 trillion worth of company shares within one year last November. As of July 2022, the company has already repurchased JPY 0.7 trillion worth of shares, the remaining JPY 0.3 trillion will be completed by November this year, demonstrating ample liquidity and a decent credit profile. 

Short-duration Bonds Are Attractive

For bond investment, Softbank issued quite a number of bonds, of which seven of them are tradeable on our platform (Table 2). Their investment horizon ranges from 0.5 to 9 years. The credit rating is BB+ by S&P.

Table 2: Bonds issued by Softbank Group

After shrinking the investment amount, although Softbank delivered poor operation results, the overall credit profile remains decent and there is still a certain safety margin. From table 2, the yield curve of USD bonds is pretty flat—the yields on short- and longer-duration bonds are both at around 7%-9%.

Given the weak performance of the global equity market, Softbank Group, which invests mainly in technology companies, may continue to face losses in the future and its long-term uncertainty has increased. Investors thus can give priority to short-duration bonds, like ‘SOFTBK 4.750% 19SEP2024 CORP (USD)’. The bond has a moderate investment horizon and yield to maturity of 7.1%, which is rather attractive for investment.

Corporate Risk

Investors should be aware of the following risk. Firstly, Softbank is exposed to high exchange risk because of the depreciation of JPY. In view of Japan’s central bank’s ongoing ultra-loose monetary policy, JPY has depreciated against the USD by over 30% year to date. Softbank will face increasing debt repayment pressure if JPY continues to depreciate, given that a big portion of the debt is USD-denominated.

Secondly, Softbank has invested in a number of US-listed Chinese technology companies such as Alibaba, Beike and Dingdong etc. Since SEC is listing more Chinese companies under the "Holding Foreign Companies Accountable Act", these companies might be forced to delist from the U.S capital market. Besides, some startups that had planned to list on the U.S. stock exchange may miss the opportunity to do so, resulting in a huge blow to Softbank Group.

Conclusion

Influenced by the valuation slump of Coupang and Didi, Softbank Group’s vision fund remarked a is a large investment loss, then resulting in a net loss of approximately JPY 1.7 trillion in FY2021. Softbank Group continued its poor performance in the first quarter of FY22 as global stock market sentiment remained depressed this year. Non-investment segments remain stable.  Credit-wise, the huge investment loss has limited impacts on Softbank Group’s cash flow, and current leverage trends down.  The overall credit profile remains decent. Bond due 2024 is yielding over 7% which makes it a good choice among BB-rated bonds.