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Technology Stocks : Softbank Group Corp -- Ignore unavailable to you. Want to Upgrade?

To: ms.smartest.person who wrote (5572)	11/13/2000 12:30:21 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 6020

FINANCE - Old Habits Die Hard Unlike most Internet players that depend on investor support as a source of low-cost funding for high-risk businesses, Softbank has relied to a large extent on debt. To what effect? -------------------------------------------------------------------------------- By Bruce Gilley/HONG KONG -------------------------------------------------------------------------------- FOR A COMPANY known as an Internet giant, Softbank has relied unusually heavily on debt rather than stockmarkets for finance. Internet companies mostly rely on sales of their own shares, plus disposals of noncore venture investments to survive. Some even earn their profits. But these are all proving to be unreliable sources of cash for Softbank's global investment strategy. As a result, the company has relied on issuing more debt for its needs, with an implied higher cost of capital. For a company navigating its way through the risky Internet economy, that's a concern to many investors. "It is not the size of the debt that worries us," says HSBC Securities in a recent report on Softbank. "It is what continued debt financing implies about the nature of Softbank itself." As of the end of July, Softbank had medium- and long-term debt of around $2.8 billion, most of it due in the next four years. About $1.9 billion of that is in the form of bonds held by investors. Since it began issuing bonds in 1995, Softbank has publicly promised to treat the bonds as its most senior debt, ahead even of loans raised from banks. For the most part, that keeps banks on the sidelines. The main financial institutions lending to Softbank are life insurers, among them Dai-Ichi Life and Daido Life. To repay the debts, Softbank could issue more shares. But that's unlikely in a weak market. It would also dilute founder Masayoshi Son's controlling 38% stake if he didn't take up his portion. Cash from operating profits, meanwhile, has fallen steadily since 1997, reaching $79 million in the year to March 31, mainly from fund management, software distribution and the few holdings whose accounts are consolidated with Softbank's own. One big uncertainty is potentially bigger losses from Nippon Credit Bank. Normally, Softbank would still be able to repay its debts and finance new investments by disposing of noncore venture investments. It did just that in October with a pretax gain of $136 million on the sale of part of its stake in Japan satellite broadcaster SKY Perfect Communications. But for the most part, the downturn in equity markets has made disposals difficult. For listed investments, the downturn means paper gains are hard to realize because any sale by a major shareholder like Softbank would set off a selling wave. In the Asia Global Crossing case, for example, Softbank's initial $339 million investment in 1999 is now worth about $600 million on paper. But the company's poorly received listing means Softbank will not be able to realize the difference anytime soon, if ever. Weakness in the share prices of Yahoo! and Yahoo! Japan also mean there's little hope of raising cash from them. Even without a depressed selling price, Softbank faces a double tax hit on repatriating U.S. venture profits to Japan. That directly reduces profits, but could also indirectly affect Softbank's own valuation as investors apply the same discount to the market value of its other listed holdings. The result: The incentive is mainly to sell only companies on which it faces a capital loss in order to recoup tax credits. It did this by booking a $182 million loss on its October sale of a 33% stake in Japan-based real-estate agency Able. Unlisted investments, meanwhile, are hard to bring to market, especially when most of them are losing money. As U.S. venture chief Gary Rieschel concedes: "It's a concern from the standpoint that if in two years that's still the case, we're going to have huge problems." With its hands tied, Softbank has been rolling over its debts rather than repaying them. It has mainly done this through bonds. But in mid-October, it returned to the banks by opening a Yen150 billion ($1.4 billion) line of credit from 10 Japanese banks. Certainly no one doubts Softbank's ability to repay the debts. The company has cash on hand of $2 billion, and in January, rating agency Moody's raised its long-term debt rating of Softbank by a notch from B1 to (a still-speculative) Ba3. But that upgrade took place before the worldwide plunge in Internet stocks. Softbank is now playing in a very different game. feer.com