Thursday, 25 April 2024
Moody's downgrades SoftBank Group to Ba3, places ratings on review for further downgrade
Moody's Japan Kabushiki Kaisha downgraded SoftBank Group Corp's (SBG) corporate family rating and senior unsecured rating to Ba3 from Ba1 as well as its subordinate rating to B2 from Ba3. At the same time, Moody's placed the ratings under review for further downgrade.
The rating action follows SBG's announcement on 23 March 2020 that it will monetise up to about $41 billion (JPY 4.5 trillion) of its investment portfolio and use the proceeds to repurchase up to $18 billion (JPY 2 trillion) of its own shares. It will use the remaining $23 billion (JPY 2.5 trillion) to pay back its debt at the holding company. The company plans to execute these transactions over the next four quarters.
SBG's latest share repurchase plan is four times the $4.5 billion (JPY 0.5 trillion) share repurchase it announced less than two weeks ago.
Ratings rationale
The two-notch downgrade to Ba3 reflects SBG's aggressive financial policy, as reflected by the unexpected size and apparent urgency of the rapid series of share repurchases, just as the drop in the stock market has put the value and liquidity of its portfolio value under stress.
"Asset sales will be challenging in the current financial market downturn, with valuations falling and a flight to quality," Moody's senior credit officer Motoki Yanase said.
In particular, the value and credit quality of SBG's portfolio would deteriorate if the company reduces some of its most liquid and highly valued listed investments, such as its stakes in Alibaba Group Holding Limited (A1 stable), SoftBank Corp and Sprint Corporation (B2, review for upgrade).
It is unclear why SBG is undertaking such a dramatic recapitalisation during a time of severe stock and market volatility. Monetising a significant part of its investment at this time risks a discount as well as a deterioration in the quality and value of its remaining portfolio.
The review for further downgrade considers the volatile capital market conditions that could weaken the valuation of SBG's investee companies, hinder the execution of its recapitalisation plan and weaken SBG's leverage and liquidity position.
Moody's review will focus on:
- The extent to which the fall in financial markets erodes the value and credit quality of the investment portfolio that covers SBG's debt
- The timing and amount of asset sales the company is able to execute under the current market conditions, as well as the credit quality of its remaining investment portfolio
- The change in SBG's capital structure as it repurchases stock, pays down debt and increases secured obligations such as margin loans
In addition, Moody's recognises SBG's substantial cash balance of about $15 billion (JPY 1.7 trillion) that covers the next two years' scheduled debt maturities. Downward rating pressure would build if this liquidity cushion weakens.
Given the ratings are on review for downgrade, Moody's does not expect upward rating pressure in the foreseeable future. An upgrade is possible longer term if SBG executes on its recapitalisation and demonstrates greater transparency and sustainability of its assets and capital structure.
Moody's would consider a further downward rating action if:
- There is a significant deterioration in the credit quality of SBG's investee companies, including difficulty in turning around WeWork
- Cash held at the holding company level diminishes, such that its cash and committed credit facilities no longer cover two years of debt maturities
- There is increase in debt, including margin loans and crystallisation of legal or other contingent obligations
The principal methodology used in these ratings was Investment Holding Companies and Conglomerates (Japanese) published in August 2018.
Headquartered in Tokyo, SoftBank Group Corp is a Japanese holding company, with subsidiaries engaged in various businesses, including telecommunications, internet and other technology businesses.
Re-disseminated by The Asian Banker
