SoftBank Questions Rationale as S&P Lowers Its Credit Rating to BB

Global private equity giant SoftBank has lashed out at credit rating agency S&P which lowered its rating by a notch from BB+ to BB, pushing the credit rating deeper into the junk category.

S&P Global Ratings cited the higher exposure that SoftBank Vision Funds have to unlisted stocks as the rationale for lowering the ratings.

Notably, the two Vision Funds also have exposure to listed securities but over the last few months, SoftBank has lowered its stake in Alibaba.

SoftBank held over a quarter of Alibaba shares three years back and was its biggest stockholder. However, amid China’s tech crackdown, it has sold most of the shares and filed to sell more shares through forward contracts.

Meanwhile, by selling listed Alibaba shares, the Vision Funds are now more exposed to unlisted companies.

SoftBank Vision Fund posted a loss of $32 billion in the fiscal year ended March which was 70% higher than the previous year and a new record for the Masayoshi Son-led company.

Notably, the values of publicly traded securities in both the funds rose sequentially – thanks to the Q1 2023 rally in tech stocks which led to a 20% rise in Nasdaq Composite.

However, the investment value of privately held companies fell by 3.6% in Vision Fund 1 and 7.7% for Vision Fund 2.

Vision Funds Posted Record Loss in the Last Fiscal Year

SoftBank was among the biggest beneficiaries of the tech boom as a lot of companies that it backed including Grab, Coupang, Didi, and DoorDash went public.

It was able to exit many of its investments at a profit during 2020-2021 as the global IPO market was red hot and investors were willing to pay a valuation premium for newly listed companies.

However, the US IPO market has been literally dead for over a year now. Given the slump in newly listed companies – as evident in the 57% loss in Renaissance IPO ETF last year – investors are now apprehensive about investing in IPOs.

While announcing the financial results for the last fiscal year, SoftBank said, “For private portfolio companies, the fair value decreased in a wide range of investments, mainly reflecting markdowns of weaker-performing companies and share price declines among market comparable companies.”

Andy Vermaut shares:SoftBank pushes back after S&P cuts rating deeper into junk Thank you. https://t.co/Wkg39NBCf2 pic.twitter.com/GVqdNhpJCO

— Andy Vermaut (@AndyVermaut) May 23, 2023

SoftBank Hits Back at S&P Over the Credit Rating Downgrade

Meanwhile, SoftBank has hit back at S&P and its CFO Yoshimitsu Goto told Reuters, “There is a marked lack of rationality in the explanation.”

In its statement, the company said, “It is extremely regrettable that our financial soundness was not properly assessed, and we will continue our dialogue with S&P.”

Meanwhile, SoftBank is working on an IPO of Arm Holdings and has filed to list the company in the US.

The company could raise as much as $10 billion from the Arm IPO which would help improve its liquidity.

Arm has a chequered past though and its merger with Nvidia was called off apparently over regulatory issues. The UK was also wooing the company to list in London but it eventually decided for a US listing.

Meanwhile, SoftBank believes that listing Arm would help its credit metrics and said, “We have strongly urged S&P to consider an upgrade once the proposed initial public offering of Arm is completed.”

All said, S&P downgrading SoftBank is a lagging indicator of the troubles that startups have witnessed over the last couple of years – where many are struggling to stay afloat while many others have had to take a haircut to raise funds.

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