SoftBank’s OpenAI ambition is too grand for banks

Shuli Ren, Bloomberg

SoftBank Group Corp., the whale that has fattened the wallets of many wealthy Asians, is back to tease with high-yielding dollar bonds again.

Founder Masayoshi Son’s latest $2.9 billion offerings will cost him. These hybrids, which allow the company to defer coupon payments and are subordinate to senior debt, have to offer extra yields to entice investors. Softbank will pay 8.25% for an issue due in 2065, with the first reset date in 2035. By comparison, the straight 2035 bond is trading at only 6.8%.

SoftBank is racing to lock down its equity investment in OpenAI. In April, it led a funding round that valued the unicorn at $300 billion, promising to invest $30 billion by year-end. It has put in only $7.5 billion so far.

The fact that Son is resorting to issuing expensive dollar and euro-denominated hybrids smacks of desperation — indeed, SoftBank has been very busy looking for money lately. It’s in talks to expand margin loans backed by its stake in ARM holdings Plc. and has been selling T-Mobile US Inc. shares. The company even tapped into domestic retail investors, issuing $4.1 billion worth of yen notes, the biggest ever in Japan.

What has largely been missing amid all this action, however, is good old-fashioned bank loans. As an investment holding company, SoftBank doesn’t have reliable operating cash flows to boast about when asking for mega financing deals. As a result, Son has to come to public markets. On a stand-alone basis, as of the end of June, the company held more than twice as many bonds as bank loans.

Also missing, of course, is venture capital fundraising. But then the Vision Funds’ dismal performance has clipped Son’s ability to attract deep-pocketed investors.

SoftBank’s conglomerate structure puts Son at a distinct disadvantage in an AI race where dealmaking is getting uglier by the day. Nvidia Corp, for instance, reportedly sidelined SoftBank and sealed a $100-billion data center deal with OpenAI to build what Chief Executive Officer Jensen Huang called “the largest computing project in history.”

Ratings agencies are vigilantly watching SoftBank’s so-called loan-to-value ratio, a key metric to measure conglomerates’ creditworthiness. S&P Global said it would consider a downgrade if the equivalent of the company’s definition of LTV creeps above 25%, which is entirely possible if one includes the OpenAI stake, a $6.5 billion acquisition of chip designer Ampere Computing LLC and undisclosed investments in Stargate. To make matters worse for Son, SoftBank’s LTV ratio is increasingly transparent, giving little room for clever financial engineering. As of the end of June, over 70% of its total assets were publicly listed.

By comparison, SoftBank’s Stargate partner, the database software giant Oracle Corp., has a much easier time. It retains an investment-grade rating, despite elevated leverage and continuing negative free cash flow. Plenty of questions have been raised as to how OpenAI, a young startup, can pay for the $300 billion cloud contract it signed with Oracle, but the database giant has a real business — and in Moody’s Ratings’ words, a “leading position across numerous enterprise software and cloud infrastructure markets.” Oracle sold $18 billion in bonds late last month. Its 2035 bond was priced at only 5.2%.

No doubt, Son is going big on AI, but can he keep up with OpenAI co-founder Sam Altman’s grand ambitions? It will be difficult given SoftBank appears to be a bit short on cash.

Courtesy Bloomberg/Shuli Ren