Japanese telecom conglomerate SoftBank Group has faced a litany of bad news in recent weeks, including reported revelations from the Wall Street Journal that the head of its Vision Fund was using corporate espionage firms to sabotage his corporate peers and that activist hedge fund investor Elliott Management had invested in the company to try to force more transparency to its balance sheet and board of directors in a bid to drive its stock price higher.
The bad news just keeps coming though.
Today, S&P Global Ratings downgraded the group’s debt outlook to “Negative” from “Stable” while affirming the debt’s rating of BB+, which is generally considered somewhat speculative or non-investment grade.
In the note from the ratings agency, S&P said that it was particularly concerned about SoftBank’s share repurchase program, which would see cash liquidity decrease as it buys up shares from investors on the public markets. That program, which would encompass about $4.8 billion in share buybacks and was announced last week, “[raises] questions over its intention to adhere to financial management that prioritizes its financial soundness and the credit ratings on it.”
My colleague Arman and I have covered SoftBank’s debt obsession obsessively on TechCrunch, but we last conducted that analysis at the tail end of 2018 when markets were still soaring and SARS-CoV-2 had yet to be discovered.
Now though, SoftBank’s penchant for debt is running straight into one of the most harrowing moments in recent economic history.
SoftBank’s debt-fueled expansion is particularly notable in its Sprint and T-Mobile telecom merger, which was recently approved by U.S. antitrust authorities and included tens of billions of dollars of debt to consummate, as well as in the Vision Fund, where special provisions in the fund’s structure guarantees a minimal level of return to investors. As the Financial Times reported back in 2017:
That debt provided by the Vision Fund’s investors will be in the form of preferred units, which will receive to an annual coupon of 7 per cent over the fund’s 12-year life cycle.
Yet, with few IPOs likely on the horizon given the catastrophic fall in the markets the past few days, what will happen to liquidity in the Vision Fund, and how will it meet that 7% minimum target? Or how will the combined Sprint and T-Mobile win over customers in a quickly souring economy to pay off down its gargantuan debt load?
The upshot for SoftBank is that it offers a service most customers consider essential. That’s one of the reasons why its debt hasn’t seen a ratings downgrade: ultimately, consumers are still going to need their smartphones to work. But with the piles of debt adding up and the economy in tatters, its future is looking evermore hazy and dangerous.