As the digital investment giant looks to finance its massive bet on OpenAI, SoftBank Group has raised $11.1 billion in notes denominated in dollars and euros in the largest high-yield corporate bond sale in history.
The transaction is the most recent illustration of how AI investments have caused corporate borrowing to soar this year, contributing to significant bond sales from big tech companies like Amazon and Alphabet.
The cash comes after SoftBank issued a 1 trillion-yen ($6.3 billion) bond to retail investors last month.
If market sentiment against OpenAI and the artificial intelligence industry declines considerably, SoftBank’s finances may come under more scrutiny.
SoftBank has committed $64.6 billion to the ChatGPT-maker, of which it will hold around 13% by next week, under the direction of Masayoshi Son, who has a long history of taking risks and is now eager to establish the Japanese company as the leading investor in AI.
Additionally, it is paying $5.4 billion to acquire ABB’s robotics division and $3.1 billion to acquire DigitalBridge.
SoftBank, which has traditionally been a junk-bond issuer, now has to pay higher yields due to the extent of its AI-related projects and the quantity of money it has sought to fund them.
Additionally, the cost of insuring its debt against default has increased.
Satoru Aoyama, senior director at Fitch Ratings, stated, “I was positively surprised by the market appetite.”
Despite having good credit ratings, hyperscalers in the US have been accumulating debt.
According to Aoyama, “AI-driven debt issuance has now reached the high-yield market at scale.”
According to LSEG data, the value of bonds sold by hyperscalers has more than doubled to nearly $200 billion this year. More is anticipated by analysts this year.
However, as the rivalry for capital intensifies, the sheer magnitude of that borrowing has been one of the reasons driving up global borrowing costs in recent weeks.
According to a filing, SoftBank issued $1 billion in dollar-denominated senior notes with terms of three and a half years, $4.5 billion at five and a half years, and $4.5 billion at seven and a half years. The interest rates on the bonds are 8.625%, 9.25%, and 9.75%, in that order.
In contrast, a $7.3 billion issue of senior bonds denominated in dollars and euros by SoftBank in June 2021 yielded between 2.125% and 5.25%.
To diversify their funding sources given their enormous financing demands, hyperscalers like SoftBank have also increased their borrowing beyond the US dollar bond market, increasingly using the euro and other currencies this year.
SoftBank has executed the largest global high-yield corporate bond issuance on record at $14.6 billion, capturing 63.4% of the Asia-Pacific and Japan high-yield market. To fulfill its financial obligations, the firm has liquidated assets and secured loans backed by its stakes in Arm and OpenAI.
Risk Profile and Valuation
Concentrated Asset Base: SoftBank’s investments in Arm and OpenAI are heavily concentrated, now accounting for 75% of the conglomerate’s total asset value.
Spike in Default Insurance: Market anxiety regarding SoftBank’s leverage has escalated sharply. The cost to insure its debt via 5-year credit default swaps (CDS) surged past 400 basis points this week, up from 280 basis points in June.
Credit Ratings and Stock Performance
Arm Buffer Counteracts OpenAI Delay: According to Makiko Yoshimura of S&P Global Ratings, Arm’s robust stock performance has bolstered SoftBank’s credit quality.
This cushion helps ensure the postponed OpenAI IPO won’t immediately downgrade SoftBank’s creditworthiness.
Potential Upgrade on Horizon: CreditSights analyst Chapman notes that a credit ratings upgrade is possible in the medium term, provided that OpenAI executes a timely and successful public listing.
Equity Market Resilience: Following a three-day market closure for national holidays from Monday to Wednesday, SoftBank’s shares finished Thursday trading up 0.6%.
