SoftBank buffeted by headwinds as it sets out to raise US$30bn for OpenAI
With the ink barely dry on an agreement to inject US$30bn into OpenAI, SoftBank Group is already facing unexpected headwinds in its efforts to raise the cash to complete the deal, with the war in the Middle East and a debt warning from S&P conspiring to derail the company’s carefully laid plans.
The Japanese investment giant signed an agreement on February 27 to almost double its investment in the ChatGPT owner. The deal will be staggered across three tranches, with US$10bn invested by April 1 followed by two equal investments to be completed by July 1 and October 1.
SoftBank said in a statement following the deal that it plans to “initially” fund the investments through bridge loans and “other financing arrangements from major financial institutions”, which will be “replaced over time through the utilisation of existing assets and other financing measures”.
It is in talks with Mizuho and its other closest relationship banks about a US$10bn bridge facility to finance the first tranche. It also plans to float mobile payments platform PayPay, a joint venture between SoftBank and Yahoo Japan, and is planning to sell shares it owns to raise around US$500m as part of the deal.
But those plans are looking shaky. While the PayPay listing launched after the US close on Monday after being delayed by the market turmoil and was fully covered by Wednesday, worsening conditions could put the deal at risk.
“I’m paid to be optimistic about what might get done but there’s no denying the shift in markets over the last few days,” said one technology banker. “There was a whole wave of IPOs coming down the line but all of that is going to get delayed now. Nobody wants to bring a deal against this backdrop.”
Downgrade warning
S&P delivered another blow on Monday when it issued a report warning that SoftBank might be hit with a downgrade as a result of its latest investment in OpenAI. There are concerns that the deal might lower the quality of its US$320bn investment portfolio, impacting liquidity and debt levels.
“We see OpenAI as one of its investments with the weakest credit quality,” wrote S&P analysts, adding that SoftBank's pivot towards OpenAI, and the AI industry more generally, “mostly involve fledgling startups and private companies that we believe are exposed to significant AI innovation risk and fierce competition".
The revision of SoftBank’s credit outlook to negative – with a clear warning that a downgrade could follow if its liquidity and loan-to-value ratios do not improve soon – comes at a tricky time for the company, which is in discussions with its main relationship banks over the bridge loan.
Leverage has been creeping up in recent quarters as SoftBank has taken on debt to participate in previous OpenAI funding rounds. S&P said the latest OpenAI investment could add four percentage points to its loan-to-value ratio, which S&P currently puts at 33%, pushing it over the 35% threshold for a downgrade.
S&P is also concerned that SoftBank's bet on OpenAI will make up 30% of the company’s portfolio. Its illiquid, private market investments will also rise to 50% of the portfolio as a result.
A banker at one firm looking to participate in the bridge loan said S&P's opinion was indeed a blow to SoftBank – but cautioned against rushing to conclusions, adding that the deal would hinge on individual banks' assessments of the OpenAI investment.
“The outlook revision to negative is certainly a downside factor, but it is not the whole picture,” said the banker. “What really matters is the purpose of the financing and the repayment story behind it, and each lender will make its own assessment based on that.”
Falling valuations
SoftBank's listed holdings have taken a beating over the past few days. While many positions are still up this year, shares in Arm Holdings, Intel, Symbotic and Alibaba Group Holding have all sold off over the past week. Given SoftBank’s extensive use of margin loans, any further market volatility could restrict its options.
“The company has listed assets to sell. However, we believe it is difficult to predict the timing and scale of the sale at this time," the S&P analysts warned. "Pressure on the ratings will increase if SoftBank Group fails to take swift easing measures, such as selling holdings.”
SoftBank signed off on its last injection into OpenAI just over two months ago, taking its investment to US$34.6bn – up from US$10.8bn at the end of September – making it the third-largest investor with an 11% stake, behind OpenAI’s non-profit foundation and Microsoft.
Its OpenAI investment sits in the company’s Vision Fund 2 portfolio, an US$85bn fund launched in 2019. But the fund – alongside the original Vision Fund – has had a difficult few years, with large losses taken on bad investments in companies including WeWork and Wirecard.
As recently as six months ago, Vision Fund 2 was more than US$15bn under water. But the writeups on OpenAI and a handful of other investments mean it is now – at least on paper – sitting on a US$1.1bn gain. The original US$40bn Vision Fund has posted gains of US$5.1bn.
Additional reporting by Wakako Sato