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SoftBank can’t count on having perpetual fans in Asia

LiveMint logoLiveMint 26-09-2017 Shuli Ren

Hong Kong: Masayoshi Son has found a new breed of believers: yield-hungry Asian investors.

SoftBank Group Corp. has already issued $7.9 billion of dollar-denominated bonds this year, but there’s a key difference versus other offerings.

These notes are unique in that they cater specifically to Asian investors. The Japanese technology conglomerate’s $4.5 billion of perpetual securities, sold in July, are registered in Singapore and classed as Reg S, meaning SoftBank couldn’t market them to money managers in the US. In 2013, when SoftBank first tapped the dollar bond market, its $2.5 billion issue was 144A.

SoftBank’s two lots of perpetual bonds, which pay a coupon of 6% and 6.875%, also include an interest deferral option. Their prospectus states that SoftBank may:

“at its discretion, elect to defer all or part of any interest payment which is otherwise scheduled to be paid on an interest payment date by giving a deferral notice of such election to the holders, the trustee and the principal paying agent. If the company elects not to make all or part of any interest payment on an interest payment date, then it will not have any obligation to pay such interest on the relevant interest payment date and any such nonpayment of interest will not constitute an enforcement event or any other breach of the company’s obligations under the notes or for any other purpose.”

That’s pretty bold stuff. And while both bonds are callable, one in six years and the other in 10, SoftBank isn’t under any obligation to go down that path. In other words, if you buy these securities, you’re prepared to allow SoftBank to roll over the $4.5 billion indefinitely without paying a cent of interest in the meantime.

Asian investors weren’t deterred. Since their sale, both notes have gained in value, pushing yields down to 5.7% and 6.4%.

Money managers’ seeming lack of concern is understandable. Country Garden Holdings Co.’s $350 million of 5.625% 2026 bonds are yielding 4.89%. Surely SoftBank, the world’s 38th-largest company by assets, is more creditworthy? Country Garden, a junk-rated Chinese developer, can lose 10% of its value in a day on news of home-sale curbs. SoftBank’s net asset value is a lot more transparent, and is updated daily on the company’s website.

SoftBank could get cheaper funding at home, thanks to the Bank of Japan’s negative interest rate policy. On average, SoftBank pays only 2.1% interest on its yen-denominated bonds, and bank loans are even less expensive.

The problem is, SoftBank is becoming too big for Japan. Excluding Sprint Corp., it’s already amassed $88 billion in net debt. That’s equivalent to almost 30% of the Tier 1 capital ratios at Japan’s three megabanks. Lenders aren’t willing to expose nearly so much of themselves to one customer.

And like China, Japan’s corporate bond market is comparatively underdeveloped, accounting for 14.6% of GDP, according to Asian Development Bank data. Meanwhile, SoftBank has picked up the pace of spending.

As my Gadfly colleague Nisha Gopalan wrote last week, SoftBank’s $100 billion Vision Fund houses a growing number of former Deutsche Bank AG traders. Perhaps they can help SoftBank market more debt instruments across Asia?

Whatever the case, Son needs to tread carefully. Right now, he’s revered, particularly in China, where high-net-worth individuals are willing to overlook onerous bond clauses. But add too much financial engineering into the mix, and those attitudes could change, putting SoftBank at a distinct debt disadvantage. Bloomberg Gadfly

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