(Dec 16): Masayoshi Son’s Japanese bankers are taking a hard look at their most important client.
After the costly rescue of office-sharing startup WeWork and a series of other high-profile setbacks for Son, senior executives at two of Japan’s biggest banking groups have said privately that they’ve grown less comfortable with the eccentric billionaire’s management of SoftBank Group Corp’s US$100 billion ($135.5 billion) Vision Fund.
One executive, speaking in mid-November, said his firm wants to see a convincing turnaround plan for WeWork before lending more money to SoftBank. A rival said around the same time his bank is taking a cautious approach toward the company and has doubts about Son’s strategy of investing big sums in highly valued startups. The two lenders are among those approached by SoftBank for a roughly US$2.7 billion loan.
While neither of the bankers, who asked not to be named, signalled a dramatic reduction in ties with SoftBank, their misgivings highlight how perceptions of Son are changing -- even among his most reliable supporters.
Japanese banks have helped finance Son’s ventures for almost four decades and are currently sitting on at least US$15 billion of loans to SoftBank and the Vision Fund. They also have extensive investment banking relationships with Son, advising him on deals and helping SoftBank raise more money from Japan’s corporate bond market than any other issuer. SoftBank has paid more than $1.9 billion in fees to global banks since 2015, much of which flowed to Japanese lenders, according to Freeman & Co.
If the industry tightens its purse strings or pushes for a greater say in how Son funds his businesses, it could complicate the tycoon’s plans to turn his debt-laden empire into a global leader in everything from artificial intelligence to health care. A key test may come in the next few weeks, as SoftBank works to finalise terms on as much as 300 billion yen ($3.7 billion) in fresh financing.
“Japanese banks have provided loans in part because of Son’s management power and capability,” said Kazumi Tanaka, an analyst at DZH Financial Research Inc. “The WeWork issue has chipped away at one of the elements that convinced them” to back Son, Tanaka said.
The 62-year-old entrepreneur turned telecom magnate turned tech kingmaker is Japan’s most prominent businessman, and SoftBank is its biggest payer of investment-banking fees by far. In a country where lenders are grappling with near-zero interest rates and moribund demand for credit, few companies loom larger over the financial industry.
But the SoftBank that lenders dealt with for much of the past two decades was a telecom-focused conglomerate with stable earnings. Today, the company is effectively a massive venture capital operation, taking on unprecedented risks that make its finances much harder to predict.
Son’s recent string of stumbles has tested banks’ commitment to the new model. Tumbling valuations for marquee holdings including WeWork and Uber Technologies Inc led SoftBank to report a nearly US$6.5 billion ($8.8 billion) operating loss in the fiscal second quarter, its first in 14 years.
The senior Japanese banker who wants to see a WeWork turnaround plan said any additional loans to SoftBank would bring his firm close to internal limits on single-borrower exposure. That wouldn’t necessarily prevent it from extending more credit, because banks can temporarily overshoot those limits, he said. But over the longer term, the lender could be restricted in doling out more loans to SoftBank.
The biggest Japanese banks that SoftBank approached for its loan -- Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc -- would see their combined lending to SoftBank climb above US$15 billion if they fund the entire deal, based on figures from March 31.
MUFG and Sumitomo Mitsui declined to comment. Mizuho, which gave Son his first loan some 37 years ago and is the biggest lender to SoftBank with US$5.5 billion of loans outstanding as of March, also declined to comment, as did SoftBank.
While Son has acknowledged making mistakes, he mounted an impassioned defence of his approach during SoftBank’s earnings presentation last month. He has acted to stanch the bleeding at WeWork by ousting controversial founder Adam Neumann and installing trusted lieutenant Marcelo Claure as executive chairman. Claure has launched sweeping cost cuts, outlined a five-year turnaround plan and brought in fresh management, including former Publicis Groupe SA CEO Maurice Levy.
In a sign that debt markets remain open to Son, Goldman Sachs Group Inc is said to be arranging a US$1.75 billion line of credit as part of WeWork’s rescue package. SoftBank is listed as the borrower and WeWork is co-borrower, the people said. It’s unclear whether any Japanese banks will participate in the Goldman debt deal.
SoftBank may ultimately prove irresistible to Japanese banks given their long-standing ties. Son got his first loan from the predecessor to Mizuho in 1982 when he was just 24, then proved a daring and reliable client over almost four decades. In October, just as WeWork’s troubles made headlines around the world, SoftBank’s Tokyo headquarters were jammed with sprawling flower arrangements from Japanese investment banks congratulating Son on his baseball team winning the national league.
There’s also a dearth of profitable lending alternatives in Asia’s second-largest economy. The company’s low credit ratings mean banks charge higher rates, said Bloomberg Intelligence analyst Shin Tamura. SoftBank is rated BB+ at S&P, one level below investment grade. Toyota Motor Corp, another large Japanese borrower, is seven notches higher at AA-.
Lenders’ thirst for yield, and for lucrative investment-banking mandates, could be a big factor in Son’s corner as he tries to negotiate the new loan. SoftBank met with Japan’s three largest banks on Nov 26 to discuss the facility, people briefed on the matter said. During the meeting, executives outlined their plans for WeWork, although the parties didn’t discuss terms for the loan, according to the people.
It wasn’t clear whether the presentation eased the banks’ qualms about WeWork.
Son and his Japanese bankers may ultimately be bound together by the sheer size of SoftBank’s junk-rated debt pile. It has US$131 billion in long-term debt, more than any other listed non-financial company after AT&T Inc, according to data compiled by Bloomberg. Any signs of a funding crunch would also shake confidence in SoftBank’s main lenders.
Japanese banks “may be getting more concerned, but they still have to provide more support,” said Michiaki Tanaka, a former investment banker who is now a professor at Rikkyo University’s Graduate School of Business.
Should banks become less accommodating, Son could turn to other funding avenues, including tapping into SoftBank’s US$39 billion of cash and equivalents. The company could also issue more bonds, although those carry higher interest rates than bank loans. Then there’s possibly the biggest ace up Son’s sleeve: SoftBank’s stake in Alibaba Group Holding, valued at US$129 billion as of Friday.
Nevertheless, a cooling relationship with domestic banks could have wide-ranging implications for Son, who is trying to raise a second US$100 billion Vision Fund so he can keep up the frenetic pace of dealmaking. Any signs of diminished confidence among the backers with the most at stake could complicate efforts by SoftBank to raise money elsewhere, said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.
“If the banks start putting their noses in the air, it makes things more difficult for SoftBank,” Yajima said.
