SoftBank's Credit Swaps Drop to Two-Week Low on Sprint Deal

(Bloomberg) -- SoftBank Group Corp.'s credit-default swaps have fallen to a two-week low after the firm decided to let T-Mobile US Inc. buy its U.S. unit Sprint Corp., a deal that could cut the Japanese tech conglomerate's debt load by trillions of yen.

The cost to protect SoftBank's notes against non-payment fell 5 basis points to 220 Tuesday following news that T-Mobile US agreed to acquire Sprint for $26.5 billion in stock, according to two CDS traders and data provider CMA. Sprint will cease to be SoftBank's subsidiary if the deal succeeds, according to a statement from the Japanese company Monday. SoftBank's interest-bearing debt will then decrease to 7.9 trillion yen ($72.2 billion) from 11.5 trillion yen, adjusted for liabilities associated with its investment vehicles and derivatives, it said.

Uncertainties remain over whether antitrust enforcers will approve the merger, but the reaction so far highlights how bond investors have come to see Sprint as a drag. The U.S. wireless carrier hasn't had a profitable year in more than a decade, weighing on SoftBank's creditworthiness -- it's rated junk by Moody's Investors Service and S&P Global Ratings. The deal could also benefit SoftBank in the long run if the combined company does well, boosting its stock prices and generating good dividends, according to SMBC Nikko Securities Inc.

“If the merger succeeds, its positive impact could overwhelm the negative impact from the listing of SoftBank Corp.,” the group's cash-cow domestic telecom business that SoftBank is considering spinning off, said Kentaro Harada, credit analyst at SMBC Nikko Securities in a report dated Tuesday. Still, it “warrants attention” whether the deal would bolster the risk of SoftBank undertaking fresh large-scale investments, he said.

Heavy Debt

S&P Global Ratings said pressure on SoftBank's credit will remain even if the merger goes through. The positive effects from reducing its U.S. burden “would be offset by SoftBank's heavy debt burden” stemming from its “highly aggressive growth strategy,” said credit analysts Hiroyuki Nishikawa and Makiko Yoshimura in a report out Tuesday.

There should be a limit on how far SoftBank's CDS could fall because the company hasn't necessarily changed its willingness to borrow, said Takahiro Oashi, senior fund manager at Asahi Life Asset Management. “What is SoftBank likely to do if a drop in liabilities gives it a wiggle room?” he said. “I think it will make different investments.”

SoftBank founder and billionaire Masayoshi Son's letting go of Sprint indicates that he can be flexible for the benefit of the entire company, Oashi said. “It shows that he makes rational judgment,” he said. “That may have impressed investors.”

To contact the reporter on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net.

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum, Finbarr Flynn

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