TOKYO -- S&P Global Ratings on Tuesday cut SoftBank Group's credit rating outlook from "stable" to "negative," citing its recently announced share buyback and falling stock prices as a risk to the Japanese technology conglomerate's financial health.
The U.S. ratings agency affirmed SoftBank's long-term credit rating at BB+, which is considered non-investment grade.
SoftBank announced a 500 billion yen ($4.7 billion) stock buyback program on March 13, in which it will buy up to 7% of its outstanding shares. The move came amid a global sell-off in stock markets, triggered by fears over the economic impact of the new coronavirus. SoftBank was also facing calls from U.S. activist hedge fund Elliott Management, which recently revealed a stake in the company, to boost share buybacks.
"SoftBank Group's announcement of a plan to buy back a considerable amount in shares amid plummeting stock markets has raised questions over its intention to adhere to financial management that prioritizes its financial soundness and the credit ratings on it," S&P said in a report.
SoftBank "may struggle to maintain a level of financial soundness that is commensurate with the long-term credit rating if continued volatility in stock prices causes its investment assets to lose substantial value," S&P added.
SoftBank has relied heavily on debt to meet CEO Masayoshi Son's aggressive pace of investments. A downgrade in its credit rating may make it more expensive for the company to raise additional debt in the future.
To ensure its financial safety, Son has pledged to keep SoftBank's loan-to-value ratio -- net debt as a percentage of the total value of the shares it holds -- at below 25% at normal times and below 35% during a financial crisis. The figure stands at 19% as of Tuesday, according to SoftBank's website.
But some credit analysts, who make their own calculations, say the figure is higher. S&P estimates that the loan-to-value ratio is currently in the 28% to 29% range. It will consider a downgrade if the figure rises to 40%.
The risk of a downgrade adds pressure for Son to spend capital less aggressively even though he is already facing calls from Elliott to buy back more shares.
"SoftBank will have opportunities to pursue additional buybacks following the completion of the Sprint/T-Mobile transaction," Elliott said after SoftBank announced its buyback program.
Moody's has a non-investment grade rating on SoftBank with a "stable" outlook while Japan Credit Rating Agency rates SoftBank as investment grade.