Son on M&A Prowl Sells Bonds After T-Mobile Flop: Japan Credit

Aug 19, 2014 12:10 am ET

Aug. 19 (Bloomberg) -- Masayoshi Son’s SoftBank Corp. is selling bonds just weeks after he abandoned the takeover of T- Mobile US Inc. and signaled he would seek different targets.

SoftBank is offering 400 billion yen ($3.9 billion) of five-year notes to individual investors, and will price the debt on Aug. 28, it said in a Ministry of Finance filing yesterday. The coupon will be in a range of 0.95 percent to 1.55 percent, according to the filing. That compares with an average yield of 0.37 percent for Japanese corporate notes and 2.58 percent for global debt, Bank of America Merrill Lynch data show.

Son said on Aug. 8 that he’s “open to any opportunities any time,” speaking after news that Sprint Corp., controlled by SoftBank, ended talks with T-Mobile on concern regulators would block the acquisition. The Japanese company’s probability of debt non-payment in the coming year has dropped to 0.3 percent from as high as 0.47 percent in May, according to the Bloomberg default-risk model, which considers factors such as share prices, debt levels and interest costs.

“Son is going to continue trying to enlarge his company,” said Naoshi Nema, an analyst at Cantor Fitzgerald LP in Hong Kong. “The next target may be a little different to T-Mobile such as an Internet-related company.”

The funds from the latest bond sale will be used to repay debt and to finance future investment, SoftBank spokeswoman Mariko Osada said by phone from Tokyo. The cash raising isn’t to finance specific mergers and acquisitions, she said.

Individual Investors

In May, SoftBank sold 300 billion yen of five-year bonds to individual investors with a 1.45 percent coupon after marketing the notes initially at 1.15 percent to 1.75 percent, according to data compiled by Bloomberg. It issued 700 billion yen of notes to individuals last year, as well as 120 billion yen to institutional investors, the data show.

“Increased retail bond sales make the possibility of default by SoftBank less likely should the company’s financial situation worsen,” said Yoshihiro Nakatani, a Tokyo-based senior fund manager at Asahi Life Asset Management Co., which manages 942 billion yen in assets.

The cost to insure SoftBank’s bonds against non-payment has dropped eight basis points this month to 172 basis points, according to data provider CMA. The Markit iTraxx Japan credit- default swap index rose three basis points during the period. A basis point is 0.01 percentage point.

Credit Ratings

Moody’s Investors Service and Standard & Poor’s both grade SoftBank at the highest junk level, according to data compiled by Bloomberg. The Bloomberg default-risk model suggests that with a 0.3 percent probability of non-payment in a year, its rating should be at the lowest investment grade.

“If it’s simply that SoftBank is raising funds at a cheap rate to refinance higher-cost debt, that would be extremely good” from a credit perspective, said Yusuke Ueda, a Tokyo- based credit analyst at Bank of America Merrill Lynch. “But that isn’t 100 percent sure, and we don’t know how much will be used for refinancing.”

The total debt of Son’s company has nearly doubled in the past year to 9.7 trillion yen, while its 12-month operating cash flow adjusted for interest expense and taxes has increased to 1.7 trillion yen from less than a trillion 12 months earlier, according to Bloomberg-compiled data.

Yoshimitsu Goto, an executive corporate officer at SoftBank, said the company plans to continue to sell aggressively to individual investors.

Diversification Needed

“Corporate bonds still only make up a small portion of investments among individuals,” Goto said in Tokyo on Aug. 8. “Japanese companies tend to have a high ratio of bank loans, but diversification is important.”

Of 1,630 trillion yen in financial assets held by Japanese households at the end of March, only 1.8 percent was invested in bonds, compared with 7.6 percent in the U.S., according to central bank data. Fifty-three percent of the Japanese funds were in cash and deposits and 9.1 percent were in shares.

Japan’s benchmark 10-year bond yield has dropped 23 1/2 basis points this year to 0.5 percent as the Bank of Japan buys about 7 trillion yen of sovereign notes a month. The yen has risen 2.6 percent in 2014 to 102.62 per dollar as of 9:49 a.m. in Tokyo, after plunging 18 percent last year.

SoftBank ended its efforts to merge the U.S.’s third- biggest carrier Sprint with No. 4 T-Mobile as regulators remained skeptical that any potential benefits would be worth allowing the number of nationwide competitors to fall below four. Verizon Communications Inc. and AT&T Inc. are the top two in the nation.

Son said he is confident about SoftBank’s ability to expand its business in the U.S. and is open to additional acquisitions.

“We look at things in the long-term, and we look at things in a very aggressive manner,” Son said in a conference call on Aug. 8. “We are here just to fight the battle.”

--With assistance from Grace Huang in Tokyo.