Rating Action: Moody’s downgrades SoftBank Group to Ba3; places ratings on review for further downgrade The document has been translated in other languages
25 Mar 2020
Tokyo, March 25, 2020 – Moody’s Japan K.K. has downgraded SoftBank Group Corp.'s (SBG) corporate family rating (CFR) and senior unsecured rating to Ba3 from Ba1, and its subordinate rating to B2 from Ba3.
At the same time, Moody’s has placed the ratings under review for further downgrade.
The affected ratings and issuers are listed at the end of this press release.
The rating action follows SBG’s announcement on 23 March 2020 that it will monetize up to JPY4.5 trillion (about $41 billion) of its investment portfolio and use the proceeds to repurchase up to JPY2 trillion ($18 billion) of its own shares. It will use the remaining JPY2.5 trillion ($23 billion) 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 JPY0.5 trillion share repurchase it announced less than two weeks ago.
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,” says Motoki Yanase, a Moody’s Vice President and Senior Credit Officer.
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 recapitalization during a time of severe stock and market volatility. Monetizing 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 recapitalization plan, and weaken SBG’s leverage and liquidity position.
Moody’s review will focus on (1) the extent to which the fall in financial markets erodes the value and credit quality of the investment portfolio that covers SBG’s debt; (2) the timing and the 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; and (3) 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 recognizes SBG’s substantial JPY1.7 trillion (about $15 billion) of cash balance 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 the SBG executes on its recapitalization and demonstrates greater transparency and sustainability of its assets and capital structure.
Moody’s would consider a further downward rating action if 1) there is a significant deterioration in the credit quality of SBG’s investee companies, including difficulty in turning around WeWork; 2) cash held at the holding company level diminishes, such that its cash and committed credit facilities no longer cover two years of debt maturities; and 3) there is increase in debt, including margin loans and crystallization of legal or other contingent obligations.
The principal methodology used in these ratings was Investment Holding Companies and Conglomerates (Japanese) published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Tokyo, SoftBank Group Corp. is a Japanese holding company, with subsidiaries engaged in various businesses, including telecommunications, internet and other technology businesses.