SoftBank share sales provide derivatives bonanza for banks

IFR 2356 - 24 Oct 2020 - 30 Oct 2020
5 min read
Christopher Whittall

SoftBank Group Corp’s use of derivatives to raise money from two of its largest investments this year provided hundreds of millions of US dollars in revenues for the banks helping to arrange these sizable, and often complex, deals.

Goldman Sachs made around US$200m from a set of transactions that helped SoftBank raise US$13.7bn against its stake in Chinese internet giant Alibaba, according to sources familiar with the matter, while JP Morgan made about US$100m.

Both banks, along with Barclays and Citigroup, also made tens of millions of dollars from packaging and selling derivatives contracts to help SoftBank reduce its holdings in T-Mobile US as part of a broader divestment of the mobile carrier to Deutsche Telekom.

The SoftBank deals, which were pivotal to the Japanese conglomerate’s massive capital raise aimed at shoring up its finances, stand out in what has been a fruitful period for banks’ corporate equity derivatives businesses. These activities typically involve helping investors hedge or manoeuvre in and out of large equity holdings, as well as lending money against these stakes.

Goldman also made around US$100m from a series of trades involving Tesla earlier this year, including some corporate equity derivatives activity, IFR has reported.

CAPITAL RAISE

The Alibaba and T-Mobile US transactions formed a key plank in SoftBank's plans to sell or monetise up to ¥4.5trn (US$43bn) in assets in order to buy back up to ¥2trn of shares, pay down debt, buy back bonds and build cash reserves.

SoftBank reported its worst ever full-year results at the end of March, including ¥1.9trn of losses on investments in its flagship Vision Fund.

SoftBank's use of complex derivatives structures has been previously reported, but the substantial revenues the trades provide for investment banks have not been detailed before given the secrecy that usually surrounds this largely private corner of finance.

Spokespeople for Barclays, Citigroup, Goldman Sachs and JP Morgan declined to comment on the trades. SoftBank did not respond to a request for comment.

Retaining exposure to an upswing in the value of these stocks after the deals had been inked appeared to be one of the main motivations behind many of the derivatives contracts SoftBank entered.

It was a particularly prominent feature of the Alibaba trades, where SoftBank looked to monetise its largest – and what chairman and chief executive Masayoshi Son has called its most important – investment, worth ¥16.2trn in late June.

SoftBank said in its annual report released in July that it used derivatives to raise US$13.7bn against its Alibaba stake through a variety of structures expected to settle at different points over the coming four years. The majority of those were so-called prepaid forward contracts under which SoftBank committed to sell Alibaba shares in the future.

UPSIDE EXPOSURE

That included a US$1.5bn forward contract due to settle in April 2024 where the price and number of Alibaba shares were fixed in advance. There was a further US$1.5bn contract due to settle in late 2023 and early 2024 where the number of shares sold would depend on their market value nearer the time, with a floor set for the share price.

Next there was a US$8.5bn so-called collar contract due to settle between January and September 2022, where the number of shares sold would again depend on their market value nearer the time, with both a cap and a floor agreed for the stock price.

Lastly, SoftBank raised US$2.2bn from a collar contract and a so-called call spread, which would allow SoftBank to participate in a rise in the value of Alibaba shares, due to settle from May to June 2024.

SoftBank also used call options to offload roughly a third of its stake in T-Mobile US to Deutsche Telekom. That involved Deutsche Telekom buying a call option on 44.9m T-Mobile US shares struck at US$103 a share (the same price as in the accompanying public offering portion of the deal).

Deutsche Telekom also bought a call option on 56.6m shares, where the price would be determined by the average value of T-Mobile US stock in the 20 trading days before the option is exercised.

Earlier this summer SoftBank's US$15.9bn public offering of T-Mobile US shares delivered US ECM bankers their biggest payday in nearly six years, showing that it was not just derivatives deals that proved highly lucrative for the Japanese firm's banking partners.

The US$238m in underwriting fees shared by the 18-firm syndicate was the biggest earner for US ECM bankers since Alibaba's US$25bn NYSE IPO in September 2014.