Thursday, 26 March 2020

SoftBank Challenge Moody’s and Raise Questions over Rating Timeliness

The giant Japanese conglomerate SoftBank, a holding company that holds shares in Sprint, Alibaba, Uber, and many others, was recently downgraded by Moody’s dragging it further into ‘junk’ status. However, it has decided to take aim at this decision and has suggested that Moody’s has ‘biased and mistaken views’. Is this retaliation to Moody’s justified, or is it a company, and a CEO, under increasing pressure as its debts continue to build?

SoftBank, founded in 1981 by Masayoshi Son (now CEO), went public in 1994 and was valued at $3 billion. Since then, it has gone on to become one of the world’s largest public companies, and Japan’s second largest behind Toyota. However, recently there have been concerns from the market that the company was exposing itself to too much debt, with the Financial Times reporting that SoftBank currently has $55 billion in net debt. It was on this basis, supposedly, that Moody’s took its recent decision to downgrade SoftBank’s credit rating by two notches, from Ba1 to Ba3. In order to reduce this debt burden, SoftBank have been planning to sell a number of its shares in the companies it holds stakes in, and increase the scale of a share buyback. It plans to sell a total of $41 billion of its shares, which the FT recently labelled as am ‘emergency’ asset sale to stem the collapse in its share price as a result of the Covid-19 pandemic. It had not been confirmed which shares would be liquidated, but analysts have suggested that its shares in Alibaba, totalling nearly $140 billion, would be a prime source of such liquidation (Son was an early investor in Alibaba).

Yet, for Moody’s, this was an ‘aggressive financial policy’ that was to form the basis of the downgrade. The rating agency suggested that the company’s value would be reduced significantly if it liquidated even parts of its stake in Alibaba, and also Sprint. Motoki Yanase, a Moody’s senior credit officer, said that ‘asset sales will be challenging in the current financial market downturn, with valuations falling and a flight to safety’. SoftBank have in turn stated that the downgrade ‘deviates substantially’ from Moody’s stated rating criteria and, as such, creates ‘substantial misunderstanding among investors who rely on ratings in making investment decisions’. As part of its official statement, SoftBank has asked Moody’s to withdraw the rating. Whilst analysts have suggested that removing the rating will likely not make much difference to the company, as it will still incur higher borrowing and refinancing costs, the unusual move is still very much a notable one. Yet, Moody’s competitors do not share their view, with S&P declaring that although it recently cut its outlook on SoftBank to negative, the planned share sales had the ‘potential to ease the downward pressure on its credit quality’. SoftBank, predictably, agree with this, stating that Moody’s rating was based on ‘excessively pessimistic assumptions regarding the market environment and misunderstanding that SBG will quickly liquidate assets without any thorough consideration’. Some analysts have fallen in line with this argument (albeit reluctantly it seems), with an analyst from CreditSights being quoted by the FT as saying ‘as much as we hate to pick sides, we do not follow Moody’s rationale here… we would go as far to say Moody’s are using the [SoftBank Group] asset sale announcement as an excuse to re-rate a credit which was overdue a downgrade’.

This brings forth an interesting issue. On one side we have Moody’s downgrading, and on the other we have its main rival and other analysts suggesting that either a. the share sale may work, and b. that the Moody’s downgrade is potentially behind the curve. There are two issues which shed more light on this. SoftBank still has an investment-grade rating from JCR, a Japanese rating agency and, as a result, is issuing significant amounts of debt into the Japanese domestic credit market. However, its position is becoming increasingly precarious but not, crucially, because of its debt exposure (though it is, of course, all interrelated and an important factor). It has been noted that one of the company’s biggest issues is that its bets on particular industries have put it directly in the crosshairs of the Covid-19 pandemic and the world that it is creating. Its ownership of companies like Uber and WeWork are coming under increasing pressure in the current climate, and the stability of the company’s $100 billion ‘Vision Fund’ is worrying investors (the fund invests in emerging technologies among other things). The company is heavily invested in industries that rely on the concept of ‘sharing’ like Uber (taxiing and shared-ride services), WeWork (co-working spaces), and Chinese company Didi Chuxing (ride-sharing). These sharing-economy industries are suffering badly at the moment and this should be one of the key aspects affecting its creditworthiness. In its rating rationale (available here [though sign-in is required]) Moody’s state that ‘it is unclear why SBG is undertaking such a dramatic recapitalisation during a time of severe stock and market volatility’. Perhaps, the exposure to industries that are capitulating in the current climate is just one, albeit a major factor in the need to reduce its debt burden so rapidly. This will, of course, be known by Moody’s, so the question can be raised as to why that factor is not included within its rationale, with the agency instead going with ‘it is unclear’ why the company are taking such apparently drastic measures. The more transparency that can be articulated via rating rationales the better, and this is a common request of the rating industry. It is likely why analysts are suggesting that Moody’s is using this stock liquidation as an excuse to downgrade when they should have done this a while ago. We spoke yesterday of the glaringly-obvious importance of ESG-consideration in the rating process in the light of the current climate, and this rating downgrade perhaps alludes to that sentiment further. A very helpful comment on social media with regards to yesterday’s post said that nobody could have foreseen the Covid-19 pandemic coming, which is absolutely true. However, moving forward, the experience can be utilised (whilst it is also worth stating that the outbreak began around the turn of the year in China, which may have raised some alarm bells, even if just on a very conservative basis). That the globalised world can be ground to a halt because of the spread of disease must now be hardwired into the rating process when an agency considers ESG in its processes, and factored in accordingly. A company which is heavily invested in the sharing economy should, with the benefit of hindsight, have this factored into their creditworthiness assessment moving forward and, perhaps, indefinitely so. The title of the post is with regards to timeliness affecting the opinion that onlookers have of rating agencies, but perhaps the key here for Moody’s is to be incredibly articulate and open with its rating rationale, even it just declares that it has attempted to connect the dots in order to come to a rating decision; stating that it is ‘unclear’ why a company is taking a certain decision will only ever lead to accusations that harm the authority of a rating agency, rather than promote it (whether rightly or wrongly).


Keywords – Moody’s, CRAs, SoftBank, Covid-19, business, @finregmatters

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