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September 27, 2023 | Premium Service | In this issue of The Institutional Risk Analyst, we return to Charles Schwab & Co (SCHW), a name that figures near the top of our subscriber emails and the “short-list” for many equity traders. Before we delve into the increasingly problematic world of US banks, however, let’s take note of the latest machinations from SoftBank Corp, the profoundly idiosyncratic Japanese hedge fund guided by the equally unpredictable Masayoshi Son.
SoftBank Corp claims that it will attempt to raise up to 120 billion yen ($808.79 million) via Japan's first public offering of bond-type class shares, Bloomberg News reports. Son, of note, owes SoftBank $5 billion which he “borrowed” to boost his compensation after a year of record losses. The latest developments come in the wake of the dismal performance of two SoftBank equity offerings for Better Holdings (BETR) and ARM Holdings (ARM).
Online lender BETR merged with a SPAC f/k/a Aurora on August 23, 2023 and initially traded at $17 per share, but subsequently collapsed to under $1. Today BETR is trading at $0.50 and has been placed on a “death watch” by several mortgage publications. Like many mortgage companies with the misfortune to be public, BETR is suffering a “valuation reset.”
Meanwhile, the “blockbuster” ARM IPO is likewise starting to feel the strong gravitational pull of rising interest rates and a slowing global economy. The much-anticipated offering of a small stake in ARM came after SoftBank’s failed attempt to sell the company to Nvidia (NVDA). The stock traded as high as $69 per share, but fell down into the mid-$40s on strong selling pressure before rebounding yesterday to close below the IPO price.
The poor performance of these two public offerings apparently caused the management of SoftBank to become unglued. SoftBank’s finance chief, Yoshimitsu Goto, lashed out at S&P after the rating agency refused to immediately upgrade the firm’s “BB” junk debt rating from S&P. Somebody needs to whisper in Mr. Goto’s ear that US rating agencies like "smooth transitions," something that SoftBank is obviously not going to provide.
Goto told the Financial Times he was “deeply disappointed” with S&P’s decision to stop short of an upgrade, despite raising its credit outlook from stable to positive. He went on yowling like a wounded hound and accused S&P Global of “not trusting the management.” True. Of note, SoftBank has "A" ratings from several non-US agencies.
Just for the record, Mr. Goto, most reasonable people don’t trust SoftBank management because of the firm’s very apparent lack of internal systems and controls. We also find it interesting that SoftBank is seeking to raise capital via a debt offering after a series of missteps and market disappointments. Has the equity tap run dry, Mr. Son?
As “Big in Japan” noted in a comment to the Financial Times: “A finance director who can’t hold his nerves is probably dealing with a very unsustainable financial situation…And yes we don’t believe SoftBank financial discipline or investment policy. The evidence is written all over the wall!” Again, very true.
So much of the image of success used by SoftBank to raise billions in private equity in past years was predicated on the illusion of value in a zero-interest rate environment. In today’s market, however, we think risk managers and investors ought to ask themselves whether the public behavior of Softbank’s executives deserves to be met with confidence or terror.
The public behavior and decision-making processes of SoftBank suggest that the organization is in trouble. The choice to move forward with the BETR IPO, for example, oozes of desperation and may create legal liability for SoftBank. It’s not clear whether Son or Goto or their other colleagues care. A year from now, will we be speaking about SoftBank and Masayoshi Son in the past tense?
“[BETR’s] SPAC partner, Aurora Acquisition Corp., once traded as high as $62.91 a share,” notes Paul Muolo of Inside Mortgage Finance. “Might a reverse stock split be in order at some point?”. Maybe. Do you think that the Financial Stability Oversight Council discussed SoftBank last week? Probably not.
Charles Schwab & Co