Son’s T-Mobile Loss a Win for SoftBank Bond Risk: Japan Credit

Aug 06, 2014 11:47 pm ET

Aug. 7 (Bloomberg) -- SoftBank Corp.’s bond investors breathed a sigh of relief after billionaire founder Masayoshi Son abandoned his nine-month effort to acquire T-Mobile US Inc.

The cost to insure SoftBank’s debt against non-payment plunged 25 basis points to 160 basis points yesterday, according to CMA. That’s the lowest since news of the talks came out in December, sending risk to a one-year high at 227 on Jan. 27. The Markit iTraxx Japan credit-default swap index was at 66.

SoftBank’s record profits at home persuaded banks and bond investors to finance Son’s entry into the U.S. market with the $22 billion purchase of Sprint Corp. last year. His ambition of adding T-Mobile to create a rival to Verizon Communications Inc. and AT&T Inc. would cost $32 billion, people familiar said. Moody’s Investors Service warned that the merged company would have as much as $75 billion of debt and a junk rating.

“This means money not going out and that’s the biggest reason” for the risk decline, said Hisayoshi Nogawa, a structured credit strategist at BNP Paribas SA in Tokyo. “There is less concern about the company taking on more debt.”

SoftBank’s bond risk may continue to recede, falling toward about 110 basis points, Nogawa said. The contracts may trade in the 110 to 130 range, Takayuki Tezuka, a senior credit analyst at SMBC Nikko Securities Inc., wrote in a report dated yesterday. A basis point is 0.01 percentage point.

Risk Swings

The default swaps jumped to as high as 325 in October 2012 after the company’s announcement of the Sprint acquisition prompted Moody’s and Standard & Poor’s to put Tokyo-based carrier on watch for downgrade. They traded at as low as 115 in December 2013, before the reports of talks with T-Mobile.

Matthew Nicholson, a Tokyo-based spokesman for SoftBank, declined in an e-mail to comment about the company’s acquisition plans and creditworthiness.

While the bond risk may decline to as low as 120 basis points, the drop will be limited by speculation about Son’s next acquisition, said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch.

“SoftBank’s CEO will probably come up with some new acquisition idea,” Ueda said.

Sprint’s Profit

SoftBank-controlled Sprint ended talks to acquire T-Mobile, a person with knowledge of the matter said, as regulatory concerns outweighed the potential benefits of combining the third- and fourth-largest U.S. wireless carries. That leaves Sprint, which has just posted a first quarterly profit, dwarfed by larger rivals.

The Overland Park, Kansas-based company posted a net income of $23 million in fiscal first-quarter. SoftBank, Japan’s third- largest wireless carrier, reported a 38.8 billion yen ($380 million) profit in the first three months of the year.

Son’s borrowing to pay for Sprint swelled SoftBank’s total debt to 9.17 trillion yen as of March 31, from 2.14 trillion yen two years prior. The company was Japan’s biggest corporate bond issuer in 2013, raising 820 billion yen in note sales, or 9.5 percent of the market, Bloomberg-compiled data show.

The extra yield investors demand to own SoftBank’s 50 billion yen of 1.689 percent securities due 2020 has fallen to 120 basis points over sovereign debt yesterday, from as high as 178 in January. Japan’s benchmark 10-year notes yielded 0.515 percent.

The decision to pull the plug on taking on even more debt greatly reduces the medium-term risks facing SoftBank, Amir Anvarzadeh, manager of Japanese equity sales at BGC Partners Inc. in Singapore, said in an e-mail note to clients yesterday.

“There will be no next move,” Amir said in a separate e- mail responding to Bloomberg’s questions. “They are simply too leveraged.”

--With assistance from Aaron Clark in Tokyo and Benjamin Purvis in Sydney.