Years ago, SoftBank founder Masayoshi Son was widely regarded as an outsider in the eyes of Japan Inc, in part because of his Korean roots. Yet today he is embraced, whether out of love or necessity.
At a time when there is virtually no demand for corporate loans in Japan, it seems SoftBank is just about the only company with any desire to borrow. Moreover, the fees it paid to its financiers have totalled more than US$2b in the past five years, according to data from Refinitiv.
Son's transformation from pariah to paragon of the business community is due to the paradoxical fact that he has become too big to fail. Banks that are already so heavily exposed are signing off on the financing for more transactions, some of them questionable. Does the general lack of concern make sense?
Mizuho Financial Group, for example, officially has something like US$5.5b in loans outstanding to the SoftBank group. But analysts at Hong Kong credit and macro funds claim that in fact the number is far closer to US$30b if total exposures to all units in the group from various pockets at the bank are included. A spokesman at Mizuho declined to comment.
Regulators are showing no sign of intervening, professing little concern for the exposures of their bank charges to SoftBank. "There are lots of assets," says one recently retired senior official. "And there are the Ali shares. We are very comfortable."
SoftBank itself says that it is "in a solid financial position" with "enormous unrealised value" from its Alibaba position. It also prefers investors to focus not on its consolidated debt but on a narrower definition that excludes some non-recourse loans to its portfolio companies. On this measure, its net debt is US$43.7b.
Credit rating agencies are not as sanguine. "The portfolio's concentration in large assets makes its value and quality susceptible to its largest asset, Alibaba. Alibaba shares account for more than 40 per cent of the portfolio's value.
The three largest assets, including Alibaba, account for a high proportion of over 70 per cent of the portfolio. This high concentration is the largest risk in the portfolio," note analysts at Standard & Poor's, adding that if Son sold shares in Alibaba the overall credit quality of his investment portfolio would probably drop.
Among the most iffy transactions is the loan Mizuho provided to Ritesh Agarwal, the founder of Oyo, to enable him to buy out virtually all of the shareholdings in his young hotel chain of Lightspeed Capital and Sequoia Capital. That led the two venture capital firms, in turn, to make 11 and 10 times their money respectively. The loan was collateralised by the Oyo shares while the whole transaction was guaranteed by Son himself.
That meant the transaction was far more risky for the lenders than for the borrower.
The valuation of Son's companies has always depended on a belief that he has endless capital to support dizzying valuations. Until recently all the private markets cared about was growth at all costs. But Wall Street cares about profitability and Wall Street usually has the last laugh.
If Son is to actually cash in on his investments, listing will be the main route and that requires profits not just revenues.
In the past few months, some people at the three big Japanese banks that have financed SoftBank's adventures have begun to be concerned about their concentrated exposure to the group and all its units.
It is late for such reservations, however. If the debt-laden edifice topples, it won't be the first time that the Japanese banks are left holding the bag.
Written by: Henny Sender
© Financial Times