TOKYO (S&P Global Ratings) March 17, 2023--Growing volatility in global stock markets is pressuring the credit quality of Japan-based investment holding company SoftBank Group Corp. (BB+/Negative/--), in S&P Global Ratings' view. Asset risk in the company's investment portfolio is likely to rise if its fund business suffers further deterioration in investment performance. The business invests mainly in unlisted companies.
SoftBank Group's fund business is increasingly likely to face stronger pressure on its investment performance. The business, including SoftBank Vision Fund 1 (SVF1) and SoftBank Vision Fund 2 (SVF2), holds about 40% of the company's entire investment portfolio and shoulders the highest asset risk in the portfolio.
SoftBank Group's fund business invests mainly in global technology companies, which tend to be highly volatile. Cumulative investment losses of SVF1 and SVF2 widened to $5.7 billion as of Dec. 31, 2022, from $1.1 billion three months earlier. This is because prices of listed stocks in both SVFs plummeted and the valuation of unlisted investees in SVF2 fell sharply. Unlisted stocks made up 65% of SVF1's investment assets and 87% of SVF2's as of Dec. 31, 2022. Unlisted companies tend to be less competitive than listed ones and more susceptible to shifts in financial markets and other external factors.
The collapse of U.S.-based Silicon Valley Bank on March 10, 2023, raises the likelihood of expanding volatility in prices of global stocks. We see no direct impact from the collapse on Softbank Group and its fund business. However, if a downward trend in stock prices in global markets accelerates, the stock prices of listed investees in SoftBank Group's fund business will likely decline further. Worsening performance of its unlisted investees in an economic downturn may delay SoftBank Group's exit strategy of publicly listing the companies. We think further deterioration in the performance of SoftBank Group's fund business may drag down the overall value of the company's investment assets. It may also increase asset risk, in our view.
Monetization of China-based Alibaba Group Holding Ltd., one of SoftBank Group's major assets, is a double-edged strategy. Further sales of shares in Alibaba are highly likely to erode the proportion of listed assets in SoftBank Group's investment portfolio. However, the company is monetizing its stake in Alibaba to enhance its liquidity; SoftBank Group had about ¥3.1 trillion in cash and equivalents as of Dec. 31, 2022.
The proportion of listed shares in an investment holding company's investment portfolio is a focus of our credit analysis. This is because swiftly selling listed shares can be a final means of repayment when unable to refinance maturing debt.
Two other factors can hurt the proportion of listed assets in SoftBank Group's fund business. One is a steep drop in share prices of listed investees. The other is a delay in listing investees.
The proportion of listed assets in SoftBank Group's investment portfolio, including listed assets in the SVFs, has not recovered. It was 43% as of Sept. 30, 2022, and 42% three months later. If we determine this proportion will not recover from its level as of the end of September 2022 in the next three to nine months or so, we may consider downgrading SoftBank Group.
Monetization of Alibaba shares and those of other listed assets are part of SoftBank Group's efforts to maintain its loan-to-value (LTV) ratio and other metrics of financial soundness. Such efforts have helped support our rating on the company over the past year or so.
However, we also see uncertainties about SoftBank Group's strategic investment capability. This is because it keeps the fund business at the core of its investment operations even though swings in stock prices have dealt a heavy blow to its investment performance. Growing asset risk, particularly in the fund business, and our reservations about its strategic investment capability are increasingly likely to offset the support its disciplined financial management provides to the rating.
A public listing of U.K.-based subsidiary Arm Ltd., currently SoftBank Group's largest asset, would be pivotal to the proportion of listed assets in SoftBank Group's investment portfolio. A listing of the chipmaker, if realized, may positively affect our assessment of SoftBank Group's business. This is because a listing would be likely to substantially improve both the proportion of listed assets in SoftBank Group's investment portfolio and the LTV ratio. That said, we don't incorporate a listing of Arm in our base-case scenario. This is because neither the timing nor the value of a listing are available.
We will examine the performance of SoftBank Group's investment portfolio and its business when it announces its results for fiscal 2022 (ending March 31, 2023), possibly in mid-May. If we see any developments surrounding the issuer, we may reassess its creditworthiness earlier. Three factors are key. One, any likelihood of erosion in the asset value of its investment portfolio and measures to minimize erosion. Two, any progress toward listing Arm. And three, LTV levels and plans to sell assets.
We may consider downgrading SoftBank Group if we have stronger reservations about its strategic investment capability because of poor performance of its fund business. We may also consider downgrading the company if the proportion of listed assets in its investment portfolio hasn't recovered from Sept. 30, 2022.
Related Research
SoftBank Group Corp., Dec. 21, 2022
This report does not constitute a rating action.
| Primary Credit Analyst: | Kei Ishikawa, Tokyo + 81 3 4550 8769; kei.ishikawa@spglobal.com |
| Secondary Contacts: | Makiko Yoshimura, Tokyo (81) 3-4550-8368; makiko.yoshimura@spglobal.com |
| Hiroyuki Nishikawa, Tokyo (81) 3-4550-8751; hiroyuki.nishikawa@spglobal.com |
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