TOKYO -- SoftBank Group, the acquisitive Japanese conglomerate, and the megabanks that work on its multiple deals, are facing concern about their close relationship and potential conflicts of interest.
Those concerns come a year after the conglomerate divested its Japanese mobile carrier. The public offering last December marked the end of SoftBank's days as a staid, domestically focused telecom operator.
The rise of SoftBank as an aggressive, globally minded tech investor has presented opportunities as well as challenges for Japanese banks and regulators.
SoftBank -- which is headed by CEO Masayoshi Son, who also steers the $100 billion Vision Fund -- has undertaken over $189 billion worth of deals in equity, debt capital markets and mergers since 2016. That in turn has generated a vast $1.9 billion fee pool for global investment banks, data from Dealogic and Refinitive shows.
Given that Japanese banks are struggling to make a profit in a country where interest rates are almost zero, that has made SoftBank an especially lucrative source of fee income for them -- especially when it comes to arranging and selling bonds to retail investors.
Retail investors are meanwhile drawn to SoftBank bonds, as their yields of around 1.4% over a seven-year period are 30 times those of Japanese government debt and three to four times more than most other yen-denominated corporate bonds.
There are, however, concerns about how well retail investors understand the risks of investing in bonds that SoftBank aggressively markets, often to Japanese retirees, as "Fukuoka SoftBank Hawks bonds," after the popular pro baseball team that it owns.
"Retail investors should be told that when returns are higher, that means risks are higher, too. There is no such thing as safe but lucrative investment," said Mana Nakazora, chief credit analyst at BNP Paribas. She added that this applies to the retail bond market in general, and that BNP Paribas does not comment on individual companies.
SoftBank corporate debt, which alone accounts for a half of Japan's corporate debt market, is rated junk by Standard & Poor's and Moody's -- although the local Japan Credit Rating Agency gives it an A- rating.
"Information disclosure is insufficient. There is a tendency to provide only good news," according to Yumiko Nagasawa, a former fund manager at Nikko Securities and a founding member of the consumer protection group Foster Forum.
Potential conflicts of interest, similar to those that marked Wall Street in the run-up to the dot.com bust in 2000 and the U.S. subprime debt crisis in 2008, add an extra level of risk.
"If a bank wants to sell SoftBank bonds because it is the lead underwriter, it should say so, rather than pretending it is a neutral intermediary," Nagasawa said.
Japan's Financial Services Agency says that banks are not required to disclose their potential conflicts of interest with SoftBank when they sell its bonds to investors, though the regulators do warn about the risks of retail investors investing too much in any one company.
The agency also said it is paying close attention to the large loans to companies such as SoftBank and is looking at whether banks are lending too much to too few companies.
The Japan Securities Dealers Association, an industry body, does not think SoftBank's run-of-the-mill bonds warrant an extra warning for retail investors, nor does it consider banks' conflict of interest to be a glaring issue. "It is not like banks are trying to shift their exposure to investors so that they can pull out of SoftBank," said Manabu Morimoto, the association's deputy chair.
But Rie Nishihara, a bank analyst at JP Morgan Securities in Tokyo and a former Bank of Japan official, warns that conflict of interest "could become a more serious issue for banks if retail investors become more sensitive to the credit risks of SoftBank and become less eager to buy its bonds."
While Japan's corporate financing system has traditionally centered on bank loans, SoftBank has upended that tradition. It is an avid issuer of retail bonds, partly because its own credit limits with Japan's three biggest lenders -- Mizuho, Sumitomo Mitsui and MUFG -- are all but maxed out by $13 billion of loans.
Despite the near-collapse of U.S. shared-office provider WeWork, which is 80% owned by Softbank's Vision Fund, SoftBank issued $3.8 billion of retail bonds in September. That followed a record-breaking $4.5 billion debt issue in April, which sold out on the first day.
"What's important is whether SoftBank has assets that can be quickly cashed out. The answer is, 'Yes,'" says Akihisa Motonishi, analyst at Japan Credit Rating Agency, the agency that gives SoftBank an A- rating. Motonishi points to SoftBank's 26% ownership of Alibaba shares that are publicly traded in New York and listed in Hong Kong in November. "Alibaba dominates the e-commerce market in China. It has a huge profit potential."
Credit default swaps, an insurance for bond defaults, tell a slightly different story. SoftBank's five-year CDS widened to over 250 basis points in late October, the time of the WeWork debacle, from around 150 basis points earlier this year, meaning investors need to pay a 2.5% fee to protect their SoftBank bonds. The CDS rate has subsequently narrowed to around 200 basis points.
Son, who has been described by a former business associate as a "gambler with a dream," works closely with investment banks.
In fact, the Vision Fund that he set up in 2017 and that has poured billions of dollars into money-losing tech startups such as WeWork, Uber and dog-walking service Wag, is largely managed by former bankers from Goldman Sachs and Deutsche Bank.
Of the eight listed on FactSet, seven investment banks have SoftBank as a "buy" or "overweight," while one has the company as a "hold." None rates SoftBank Group as a "sell."
As for potential for conflicts of interest in Japan's retail bond market, the risks are compounded by the fact that institutional money often shies away from junk debt, so the main buyers of SoftBank debt are often unsuspecting retail investors.
At the same time Japan's biggest banks, led by Mizuho Financial Group which is also SoftBank's main lender, are trying to boost their profitability by shifting to a "universal banking" model that offers both wholesale investment banking and retail services.
This "originate-to-distribute" model is sometimes cited as a cause for the U.S. subprime mortgage crisis that saw Wall Street banks slice and dice mortgage loans and sell them on to retail investors with little heed as to their true risk.
A Mizuho official says the bank does not push particular financial products to investors, nor does it favor SoftBank because it is a big corporate customer. It is not clear, however, whether the bank explains to its retail customers about its SoftBank relationship.
"If Japan moves to market-based financing, it needs to ensure more information is provided about the risks of investment," said Ryoji Yoshizawa, senior director at S&P Global Ratings.
While no analysts expect SoftBank to actually default, Moody's analyst Motoki Yanase stresses that SoftBank has risks.
These include SoftBank's dependence on one asset -- its 26% holding in Alibaba Group which is worth $120 billion -- to ensure its solvency. It is also largely dependent on one man -- Son -- for management.
On top of that, the company lacks a regular revenue source except for the $2.5 billion in dividends a year it receives from its Japanese telecom subsidiary, and it has massive debts of 4.5 trillion yen ($41.1 billion), plus a further 13.5 trillion yen of liabilities held by subsidiaries such as WeWork.
Yukiko Kawamoto, a former Nikko Securities fund manager who now leads a financial literacy group for women, says Japan has very few analysts independent of big banks or corporate groups.
There is also no organization that protects the positions of financial analysts. As a result the country lacks the same kind of lively debate she sees in U.S. news shows, in which SoftBank's risks and recent travails would surely headline.
"Freedom to express opinions is not guaranteed for financial analysts in Japan," she said.
Additional reporting by Wataru Suzuki.