Investment strategies & junk bonds of Japan's Softbank

Softbank was world’s first to bet and invest in AI and has been continuing its dominance in the segment. Softbank, founded by Masayoshi Son in Japan, is the world’s most unconventional technology investment group. It has about $600 billion assets with $50 billion annual revenue. Has a net debt of $67 billion. In 2010, Masayoshi Son presented a 300 year plan which suggested that humans will communicate with telepathy, coexist with super intelligent chips, and live alongside cloned sheep, etc.

In year 2017, Softbank shook the world by launching world’s largest ever private equity titled as Vision Fund with $100 billion. The Group made Japan’s largest IPO in 2018 with Softbank Corp, which is also globally second biggest at that time. Softbank has invested in 500 plus companies including Yahoo Japan, Arm Holdings, UK, Uber, OpenAI, ByteDance, WeWork, Oyo Rooms, Symbiotic, Perplexity, Nvidia, Intel, Wayve, Didi, Grab, Revolut, Nubank, Chime, Lenskart, Delhivery, Swiggy, and Ofbusiness.

Softbank’s $20 million investment in Alibaba Group in 2000 became $100 billion by 2014 turning to be world’s largest gainful tech investment. In India, Softbank invested in 26 companies over the past 15 years committing $15 billion. There are several strange things associated with Softbank. It exited its $3 billion investment from Nvidia in 2019, which is now equivalent to $250 billion. As per Softbank’s commitment to OpenAI, its investment of $64.6 billion is completed on 1st October 2026.

Softbank received 13% share in $500 billion valued OpenAI. Besides investment strategies of Softbank, the means through which Softbank funded its investment in OpenAI has also been unique. Already, Softbank invested $36.5 billion in OpenAI by mobilizing debt funds. Presently, the balance $30 billion is invested. The last tranche of investment was met by sale of $11.1 billion worth bonds. The tenures ranged between 3.5 years to 7.5 years, and the coupons ranged between 7.125% to 9.75%. The cost of credit default swaps (CDS) on Softbank bonds crossed 400 bips.

They obtained junk credit rating of BB+ but received 4 times subscription. Citi Group, JP Morgan, Morgan Stanley, and Goldman Sachs acted as the coordinators and initial purchasers of the bond issue. This is the world’s largest Junk Bond issue with relatively highest coupons. Previous issue by Softbank in 2021 of same credit category carried 2.1% to 5.25% coupons.

Softbank has been implementing leveraged debt to equity cycle which is very unusual and highly risky. 

It has been mobilizing funds through short term bridge loans, margin loans, prepaid forward contracts, and bond sales. The inter leveraging of debt and liquidating debt with equity gains has been fruitful for Softbank due to significant overall capital appreciations in its equity investments. Delay in the capital appreciations, IPOs by investee companies like OpenAI, unavailability of follow-on round of debt, substantial increase in the market yields, slowdown in tech sector, and any new regulations may impede or even obstruct the journey. Particularly its investment of $65 billion in OpenAI is a riskier bet given the uncertainty of valuations in AI sector. But AI and such risky bets have been soft bastions of the Softbank.

(Dr. Kishore Nuthalapati is serving as the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad.)