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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: We're very pleased to have with us on the show.

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Speaker 1: Luk At de Powley, who covers distressed debt for Bloomberg

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Speaker 1: News in London, thanks for joining us, Thanks for having me.

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Speaker 1: We're also delighted to welcome Sharon Chen from Bloomberg Intelligence

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Speaker 1: in Singapore. We'll be coming back to Sharon and a

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Speaker 1: little bit to talk about SoftBank, a big name that

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Speaker 1: everyone's watching. So do stay with us. But first, Luc

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Speaker 1: at the Powley with Bloomberg News, you've been digging deep

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Speaker 1: into distress debt. There's a lot of it about. Let's

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Speaker 1: talk about your latest scoop. A sixty four billion dollar

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Speaker 1: pile of debt from some of the biggest companies has

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Speaker 1: suddenly come to light. It was hidden, you found it.

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Speaker 1: What's the story there?

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Speaker 2: Luca So a colleague and I have been through all

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Speaker 2: of the latest file from the US where many companies

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Speaker 2: have for the first time disclosed using arrangements called supplier financing.

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Speaker 2: Supplier financing is effectively a form of financing where you

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Speaker 2: pay your suppliers later, often with the help of a

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Speaker 2: financial intermediary or a bank, and by doing so, you

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Speaker 2: increase the amount of cash that you have. You basically

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Speaker 2: suspend your liabilities for a period of time, and you

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Speaker 2: end up being more cash rich as a result. They

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Speaker 2: were forced to disclose it by FASBY, which is the

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Speaker 2: body that is basically in charge of accounting rules in

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Speaker 2: the US, and similar rules will come into effect for

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Speaker 2: other companies around the world. But this is the first

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Speaker 2: time we've had a really good look at how many

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Speaker 2: companies use this and how aggressively they use it, and

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Speaker 2: I think we were kind of surprised by how many

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Speaker 2: companies were doing it and.

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Speaker 3: The amount of supply chain financing that was going on.

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Speaker 1: So then just break it down for supply of finance,

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Speaker 1: you kind of describe it, But how does it work?

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Speaker 1: In really basic terms? Do I do I get someone

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Speaker 1: to supply something to me and I'd pay them later,

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Speaker 1: and then in the interim, I'm cash rich because I

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Speaker 1: actually have the money myself. But what's the story? Yeah,

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Speaker 1: I'm not, I understand.

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Speaker 2: So the most the most like basic way I like

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Speaker 2: to think about it is if you've got a supermarket

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Speaker 2: and a supermarket has you know, there's a hypothetical supermarket

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Speaker 2: has suppliers.

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Speaker 3: Let's say that they're farmers.

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Speaker 2: And the original idea of this was that the farmers

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Speaker 2: might want to get paid in sort of ten days

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Speaker 2: or immediately, but the payment terms from you know, the supermarket,

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Speaker 2: so someone like a Tesco in the UK or a

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Speaker 2: Walmart in the US, you could reduce the amount of

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Speaker 2: time that it took for that payment to be made

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Speaker 2: by getting a bank to come in between and pay

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Speaker 2: the supplier earlier. So the farmer, rather than waiting ninety

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Speaker 2: days for the eggs is given, he can get it

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Speaker 2: in ten days and he pays a small discount, he

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Speaker 2: gets paid sorry, a small discount by the lender, and

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Speaker 2: then a lender gets paid in full when the invoice

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Speaker 2: is actually due. That's sort of like the most sort

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Speaker 2: of vanilla and basic form of supplier financing and a

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Speaker 2: hypothetical example, but it's been taken to sort of new

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Speaker 2: and extreme heights based on the stuff that we've seen

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Speaker 2: disclosed in the reports, to sort of you know, far

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Speaker 2: longer payment terms and you know, an altogether different transaction

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Speaker 2: than the one I described there.

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Speaker 1: So in basic terms, it's just like a bridge. You

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Speaker 1: I need something from somebody, the bank will come in

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Speaker 1: and just bridge that transaction, offering money to the supplier.

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Speaker 2: Yeah, so the supplier supply gets paid early, they take

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Speaker 2: a small hit depending on the discount rate the prevailing

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Speaker 2: interest rate, and then they can get their money quicker,

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Speaker 2: which is what a lot of them want. Yes, so

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Speaker 2: that's the basic idea, but it's been sort of it's

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Speaker 2: gone a little bit more extreme than that in the

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Speaker 2: past or ten years.

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Speaker 1: And what kinds of companies were talking about? You mentioned Tesca,

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Speaker 1: but are we talking about big household names in the US.

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Speaker 2: So, yeah, I mean we're talking about Philip Morris, We're

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Speaker 2: talking about Signa, which is an insurance company, a lot

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Speaker 2: of auto parts companies, Doctor Pepper, curic A Cure, Doctor Pepper,

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Speaker 2: even a really large sway that different companies Boeing around

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Speaker 2: seventy or eighty that we found inside the S and

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Speaker 2: P five hundred. I'm sure if we expanded our universe

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Speaker 2: and looked through even more ten ques, then we could

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Speaker 2: maybe find some more. But my colleague Nicola White and

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Speaker 2: I are pretty fed up of looking through them, to

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Speaker 2: be honest, so we might just stick with.

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Speaker 1: Those but so you talk about it's getting more extreme.

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Speaker 1: It's not just let me a million dollars for a

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Speaker 1: week or something. It's now gone out much much further.

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Speaker 1: So it's real like long term. What's the term we're

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Speaker 1: talking about.

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Speaker 2: Yeah, So, I mean, it's not really totally clear from

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Speaker 2: the filings that we have, so FASBIS compelled companies to

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Speaker 2: give a certain amount of information, but not as much

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Speaker 2: information as some people would have liked. So we have

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Speaker 2: some idea of how long some programs are, but there

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Speaker 2: are quite a few that seem to go to three

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Speaker 2: hundred and sixty days, which, when you think about it,

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Speaker 2: is a crazy payment term to accept. Effectively, supplier is

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Speaker 2: saying like, I'm happy to be paid in three hundred

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Speaker 2: and sixty days, and then a financing party comes between

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Speaker 2: them and could pay them earlier. But you know, you

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Speaker 2: think about that as sort of like that's basically what

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Speaker 2: they've agreed to. It's kind of a crazy thing for

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Speaker 2: the supplier to agree to. And then on the other side,

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Speaker 2: what that can do is create this sort of debt

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Speaker 2: debt like whatever you want to call it, effect where

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Speaker 2: people are you know, suspending their payables for longer and

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Speaker 2: then for increasing the amount of cash that's generated the

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Speaker 2: company despite not you know, that not being due to

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Speaker 2: anything organic sales or something like that.

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Speaker 3: Effectively, if you think about it.

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Speaker 2: For yourself, you were you know, if you could delay

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Speaker 2: all of your liabilities, your mortgage or whatever by a year,

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Speaker 2: you'd have more cash, but you wouldn't actually be richer.

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Speaker 2: And that's effectively what a lot of companies seem to

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Speaker 2: have done here. So yeah, it's more extreme than I

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Speaker 2: would have anticipated. And the financing is a lot longer

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Speaker 2: than sort of what you'd normally associate with something in

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Speaker 2: the accounts payable line in a set of companies accounts.

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Speaker 2: It's not sort of invoices waiting to get paid. It's

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Speaker 2: three hundred and sixty days long.

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Speaker 1: And just so people understand what is FASBE you mentioned

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Speaker 1: that earlier.

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Speaker 2: FASB is basically the body that looks after accounting regulation

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Speaker 2: in the US, so they govern us GAP so that

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Speaker 2: they're in charge of instituting new rules, and this is

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Speaker 2: one of the new rules the instituted actually interestingly at

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Speaker 2: the behest, at least in part of ratings agencies who said, like, look,

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Speaker 2: we don't have enough disclosure around this sort of debt,

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Speaker 2: like line item. We need more disclosure because if we

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Speaker 2: don't have it, then we can't rate these companies properly,

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Speaker 2: you know, and a lot of the ratings agencies have.

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Speaker 3: Been trying to sort of guess around this for a while.

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Speaker 3: You know.

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Speaker 2: I have general rules that like anything beyond ninety days

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Speaker 2: should be considered sort of debt, and anything less than that,

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Speaker 2: you know, it wouldn't be considered debt for the company

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Speaker 2: with the supplier of financing program. But yeah, that's sort

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Speaker 2: of the why this has come up now. The industry

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Speaker 2: itself has been growing for years and years and years.

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Speaker 2: But the reason that we wrote the story now is

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Speaker 2: because the first time we've got a decent data set,

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Speaker 2: and we don't have everyone a lot of companies haven't

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Speaker 2: reported yet.

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Speaker 3: We've got a decent data set.

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Speaker 2: We can see roughly how big this form of financing is,

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Speaker 2: and it's pretty big, but.

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Speaker 1: It could be more than sixty four billion dollars.

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Speaker 2: Yeah, so I mean it's really hard to know. I mean,

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Speaker 2: there is there are some trade bodies who try and

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Speaker 2: take a stab at how big supply chain finance is.

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Speaker 2: One figure from a sort of a trade publishing house

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Speaker 2: called BCR. They reckon the two point two trillion dollars

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Speaker 2: of supply chain finance was issued globally last year. It's

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Speaker 2: just a sort of you know, that's a poll for

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Speaker 2: people within the market that they've done, and it's not

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Speaker 2: always totally clear. You know, it's not an easy number

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Speaker 2: to get a hold of, but that's a huge amount

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Speaker 2: of financing, and I don't think it's sort of impossible

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Speaker 2: based on what we found and what's still like a

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Speaker 2: relatively small subsection of companies.

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Speaker 1: But the companies we've talked about Philip Morris, TESCA, I mean,

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Speaker 1: they're not companies that are in trouble at all. They've

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Speaker 1: got cash, they can you know, this is just like administration.

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Speaker 1: Really it doesn't seem like a problem. But when could

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Speaker 1: it be a problem?

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Speaker 2: Does it?

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Speaker 1: Does it become an issue for weaker companies when credit

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Speaker 1: gets tied? I mean, how does it all unravel in

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Speaker 1: the worst case scenario?

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Speaker 3: Yeah? Sure. So.

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Speaker 2: One of the problems I have is because I'm a

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Speaker 2: distressed debt reporter, everyone sort of panics when I bring

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Speaker 2: him up.

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Speaker 3: And I don't think that's like necessarily the case here.

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Speaker 2: I don't think, you know, people are going to you know,

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Speaker 2: fall apart under the weight of the supply chain financing programs.

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Speaker 2: But you do have some pretty, you know, sizable examples

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Speaker 2: where supply chain financing has played a really important role,

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Speaker 2: not so much in the US, but definitely in Europe.

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Speaker 2: So I think it's still the UK's biggest bankruptcy ever

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Speaker 2: was Karellian and Karellion collapsed almost instantly.

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Speaker 3: In twenty eighteen. I think it was, yeah, twenty eighteen.

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Speaker 2: When a lot of a lot of the reason that

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Speaker 2: it was so leveraged and its leverage was kind of disguised,

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Speaker 2: was because it was using supply chain financing really aggressively.

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Speaker 2: So rather than coming up in their sort of debtline

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Speaker 2: of their accounts, it came up in their accounts payable.

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Speaker 2: An analyst kind of knew something was going on, but

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Speaker 2: they didn't have a really good idea of, you know,

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Speaker 2: quite how leverage this company was. In the UK, generally

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Speaker 2: companies go into administration and then you know, restructuring advisors

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Speaker 2: come in and try and find a solution for the company. Here,

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Speaker 2: the company just went straight into liquidation because there was

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Speaker 2: no recovery to be at. It was just, you know,

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Speaker 2: they basically one of the best recoveries they've had. We

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Speaker 2: still don't know the number is issuing the order to

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Speaker 2: signed off on a lot of this stuff. Then there's

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Speaker 2: a company called ab and Goer which had several brushes

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Speaker 2: with insolvency over the years, like a Spanish company which

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Speaker 2: did some creative accounting. There was you know, there was

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Speaker 2: some supply chain finance there. And then the example that

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Speaker 2: people talk about a lot is green Sill, which although

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Speaker 2: really the problem with green Sill was kind of more

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Speaker 2: exotic than supply chain financing and more to do with

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Speaker 2: you know, future receivables or whatever. That was one of

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Speaker 2: the businesses, you know, one of the businesses they operate,

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Speaker 2: and certainly the business they were most vocal about was

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Speaker 2: you know, doing supply chain financing for big companies like.

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Speaker 3: General Mills or Vodaphone.

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Speaker 2: So, yeah, like it has been a problem in the past,

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Speaker 2: and I guess the real issue is, like if you

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Speaker 2: got into a situation where banks were less likely to

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Speaker 2: give you credit, this is something they can pull immediately.

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Speaker 2: It's not like a facility. It's not like a loan

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Speaker 2: or a bond where you have a maturity and you

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Speaker 2: know you've got this capital until a certain date and

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Speaker 2: then you're got to pay it back. This can just

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Speaker 2: be pulled pretty much whenever, depending on you know, the

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Speaker 2: specific contracts, which you know, I'm not really privy to.

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Speaker 2: This is mostly almost entirely uncommitted as far as I

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Speaker 2: can tell. And that's kind of a risky sort of

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Speaker 2: thing to happen with have within the capital structure, because

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Speaker 2: you know, if all of a sudden you've got to

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Speaker 2: accelerate all of those liabilities you've extended for three hundred

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Speaker 2: and sixty days, you're going to find yourself incapable of

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Speaker 2: doing that. In a lot of cases, you know, do

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Speaker 2: you have a revolving credit facility that can cover that?

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Speaker 3: Do you have cash in your bank account that can

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Speaker 3: cover that? Maybe not?

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Speaker 2: And in a ties of credit market, it's you know,

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Speaker 2: while it doesn't seem like it's likely to happen to,

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Speaker 2: you know, these big companies that we've been talking about,

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Speaker 2: it seems likely they could happen to someone as a

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Speaker 2: bank step back from lending to corporates.

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Speaker 1: And you mentioned rating agencies. Is it a ratings issue

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Speaker 1: that some of these bigger companies liable to a downgrade

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Speaker 1: because of the stuff you.

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Speaker 2: Think potentially, but it's it's a hard one because how

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Speaker 2: you characterize this is still pretty hard to do based

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Speaker 2: on some of the disclosures. I mean, we've spoken to

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Speaker 2: a number of people from from raising's agencies and you know,

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Speaker 2: interested investors, and they say like, well, there's just not

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Speaker 2: really enough disclosure to make, you know, sort of hard

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Speaker 2: and fast, like Okay, we think that there's actually a

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Speaker 2: few more turns of leverage on there, so we're going

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Speaker 2: to knock you down a notch or whatever. But I

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Speaker 2: think I think it, Yeah, it's quite feasible that it

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Speaker 2: will happen to someone of the hundreds of companies which

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Speaker 2: are going to have to report this over the next

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Speaker 2: few years, as you know, the rules outside of the

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Speaker 2: US get implemented as well. So yeah, that that is

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Speaker 2: a real possibility. And the other thing that is going

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Speaker 2: to happen is credit is not only becoming more scarce,

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Speaker 2: but as a result being more scarce is getting more expensive.

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Speaker 2: And one of the things that we're starting to see

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Speaker 2: happen is like suppliers who remember in this transaction, actually

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Speaker 2: bear the cost of the financing. They're the ones who

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Speaker 2: get paid earlier for you know, a smaller amount than

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Speaker 2: what they're owed are looking at instead of like, you know,

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Speaker 2: oh it's only a couple of percent or whatever. With

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Speaker 2: the way rates have gone up recently, are now looking

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Speaker 2: at a far larger chunk of their invoices being spent

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Speaker 2: on financing for.

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Speaker 3: You know what.

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Speaker 2: Although may be sort of like helping the supplier, is

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Speaker 2: also in a lot of cases definitely helping the larger company,

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Speaker 2: which is sort of an interesting roundabout way of financing yourself, right.

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Speaker 1: And the bank's going to be making a lot of

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Speaker 1: money on this.

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Speaker 2: Yeah, I mean it was. It's not a very risky

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Speaker 2: form of lending. It's as I say, we don't have

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Speaker 2: all the contracts for all the different for all the

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Speaker 2: different agreements that are with the parties.

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Speaker 3: But I would wager.

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Speaker 2: That you know, they're in a pretty good position. Nobody

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Speaker 2: really wants to sort of renege on their debts. It's

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Speaker 2: very short term, so it's sort of you know, you've

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Speaker 2: got that sort of you're temporally senior at some people

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Speaker 2: like to say you're at the front of the queue

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Speaker 2: because you're the first people who are going to you know,

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Speaker 2: get paid out of a company. So so yeah, it's

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Speaker 2: considered like quite unrisky in a lot of cases. There

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Speaker 2: are also examples of people who buy this as investors,

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Speaker 2: not just the banks that are doing it, but from

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Speaker 2: people I've spoken to in the market. A lot of

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Speaker 2: this is done by sort of the corporate banks of

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Speaker 2: a particular company, you know, the sort of relationship banks.

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Speaker 2: They're the ones who are providing the financing. And yeah,

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Speaker 2: it's probably sort of a fairly unrisky way to provide

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Speaker 2: credit to the suppliers. But you know, also to an extent,

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Speaker 2: the larger company with the with the program.

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Speaker 1: Great stuff. Luk at Appali from Bloomberg News, thank you

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Speaker 1: so much for joining us. Thank you read all of

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Speaker 1: lucas scoops on the Bloomberg terminal and of course at

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Speaker 1: Bloomberg dot com. Moving on to another big topic. As

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Speaker 1: I mentioned earlier, we're very fortunate to have with us

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Speaker 1: Sharon Chen, who covers a whole load of things infrastructure, telecoms,

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Speaker 1: utilities across Asia for Bloomberg Intelligence based in Singapore. How's

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Speaker 1: it going over there, Sharon?

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Speaker 4: Great? James, how are you very well?

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Speaker 1: Thank you thanks for joining us. So there are a

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Speaker 1: number of names that we're going to focus on in particular,

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Speaker 1: but before we do. What's the mood on the ground

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Speaker 1: over there are people upbeat about the economy where you are.

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Speaker 5: I think Singapore is obviously a bit more exposed, but

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Speaker 5: I think Southeast Asia there's a lot of talk about

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Speaker 5: southeas Asia in general being a safe haven, you know,

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Speaker 5: if you know the global economy slows down.

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Speaker 1: Okay, interesting, So let's start with a big one that

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Speaker 1: you cover. Soft Bank. We hear about them all the time.

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Speaker 1: The news isn't always good. First of all, let me

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Speaker 1: ask what is soft Bank? Why are they so important?

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Speaker 4: So?

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Speaker 5: SoftBank is a very high profile investment holding company that's

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Speaker 5: focused on investing in startups in the technology sector. So

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Speaker 5: it's always making headlines right in terms of what they're

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Speaker 5: investing in, whether it's we work, whether they're trying to

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Speaker 5: IPO arm and in the credit space in particular. It's

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Speaker 5: a very bond issuers. So they've got about forty billion

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Speaker 5: dollars of bonds outstanding, and that's why I'm very, very

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Speaker 5: focused on this company.

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Speaker 1: So that's one of the biggest issues. They're based where

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Speaker 1: in Japan?

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Speaker 4: Yes, it's based out of Japan.

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Speaker 1: Okay. They were recently downgraded. There was lots of news

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Speaker 1: about that what led to a weakening credit credit profile

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Speaker 1: at the bank.

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Speaker 5: So S and P downgraded to double B. Moodies has

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Speaker 5: it at BA three with negative outlook. I guess this

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Speaker 5: is going back a bit. But back in twenty twenty

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Speaker 5: one we saw soft Bank really ramp up investments through

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Speaker 5: SoftBank Vision Fund too. And obviously, starting from last year

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Speaker 5: we've seen rising interest rates and all the technology stops

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Speaker 5: come under pressure. More recently, we've got Silicon Valley Bank

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Speaker 5: collapsing and that has reduced liquidity for all these startups.

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Speaker 5: So the soft Bank Vision Fund has really wracked up

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Speaker 5: some investment losses in the past year. It was about

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Speaker 5: thirty eight billion dollars worth of investment losses, and so

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Speaker 5: SoftBank has had to sell some of its other better

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Speaker 5: quality assets to shore up its balance sheet. Is liquidity,

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Speaker 5: and you know, it used to own close to I

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Speaker 5: think twenty percent of Ali Baba and now they've monetized

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Speaker 5: almost everything and that's by far the strongest. So the

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Speaker 5: portfolio quality for SoftBank has has really suffered in the

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Speaker 5: past couple of years.

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Speaker 1: Interesting, So what's the near term risk shown? Is it manageable?

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Speaker 4: Yes?

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Speaker 5: Actually so, even though it's just been downgraded. The company

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Speaker 5: is actually in a fairly good position at least in

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Speaker 5: the next couple of years. It's got about thirty billion

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Speaker 5: dollars worth of cash, it has proven that it has

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Speaker 5: good funding access, especially to the Japanese yend market, and

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Speaker 5: it's also lowered it's adjusted loan to value to twenty

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Speaker 5: four percent, so that's a fairly healthy level.

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Speaker 1: And what are we looking for next? There's an IPO

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Speaker 1: in the works. Can you talk a bit about that

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Speaker 1: and how it will affect them?

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Speaker 5: Yes, so I mentioned earlier an IPO of ARM. So

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Speaker 5: ARM is chip designer, and you know, if you've been

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Speaker 5: following the news and VideA and some of the other

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Speaker 5: chip companies out there have really rallied very strongly because

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Speaker 5: there's so much excitement about AI in general, and so

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Speaker 5: there was some consens about execution risks just given the

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Speaker 5: IPO market hasn't been the strongest this year. But you know,

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Speaker 5: looking at how some of their peers are doing, I

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Speaker 5: would I believe the company could be in a position

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Speaker 5: to IPO And it's target is by the end of this.

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Speaker 1: Year, So what happens after that? Are they going to

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Speaker 1: increase investments? They can do share buybacks, so you know.

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Speaker 4: All thatse being equal.

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Speaker 5: Obviously the rm IPO would be positive, right, it would

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Speaker 5: lower LTV, it would improve liquidity and also the portfolio quality.

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Speaker 5: But then I don't expect software to really sit on

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Speaker 5: a mountain of cash and not do anything right. So

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Speaker 5: the company has been that if you follow their earnings

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Speaker 5: called previously they keep talking about being in a defensive mode,

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Speaker 5: but now in the latest one they do talk about,

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Speaker 5: you know, there could be potential opportunity out there, and

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Speaker 5: they are in a good position to you know, pivot

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Speaker 5: away from the defense mode when they see the right opportunity.

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Speaker 5: So the question I think from a credit perspective is

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Speaker 5: how fast will soft Bank ramp up their investments, you know,

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Speaker 5: because you know the macro backdrop isn't isn't the strongest yet,

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Speaker 5: so that's one thing to watch. SoftBank is also prone

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Speaker 5: to doing a lot of large share buy bags, so

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Speaker 5: that could be another use of proceeds, and obviously if

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Speaker 5: they use some of the process to repay that, that'll

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Speaker 5: be great.

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Speaker 1: And the medium to long term and they've got a

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Speaker 1: large portion of the portfolio and startups within the soft

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Speaker 1: Bank Vision Fund. What's going on.

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Speaker 5: There so I mentioned earlier they've sold off Ali Baba

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Speaker 5: if they did ramp up investment and division funds. So

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Speaker 5: if you look at the portfolio now compared to pre COVID,

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Speaker 5: pre COVID, I think Ali Baba, which is rated single

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Speaker 5: A is made up about half of soft Bank's portfolio,

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Speaker 5: and now that's close to almost zero, and you've got

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Speaker 5: soft Bank Vision Fund at about forty percent of the portfolio.

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Speaker 5: Majority of these are unlisted, less mature companies and obviously

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Speaker 5: higher risks, especially if you're compared to the likes of

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Speaker 5: Ali Barber. So there's just less visibility in terms of,

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Speaker 5: you know, how they can realize some of you know,

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Speaker 5: monetize some of these assets in the future. And the

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Speaker 5: other thing that has been happening is there's been quite

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Speaker 5: a few senior management changes in software in the past

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Speaker 5: couple of years and could potentially we could potentially see

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Speaker 5: some you know, shifts and investment strategy. That's another uncertainty.

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Speaker 5: I mean, there's been talk about soft Bank looking at

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Speaker 5: private credit, for example, which is a brand new area

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Speaker 5: for the company.

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Speaker 1: Is that a good thing for them? And we hear

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Speaker 1: so much about it. I'm based in New York, obviously,

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Speaker 1: and we hear we hear about private credit being the

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Speaker 1: big new thing. I mean, what what what does soft Bank?

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Speaker 1: You know, what's their edge in private credit?

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Speaker 5: Well, so, as I mentioned before, they haven't really done it,

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Speaker 5: but obviously I think they would leverage their know how

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Speaker 5: and their expertise in the technology sector already to branch

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Speaker 5: into this this mark. So we'll have to see how

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Speaker 5: how they fare, because it sounds like that it's getting

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Speaker 5: quite competitive.

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Speaker 1: Definitely. Yeah. Okay, So the other company we're going to

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Speaker 1: talk about Rakuten, also in Japan, another very interesting situation.

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Speaker 1: But before we dig into the details, just let us know,

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Speaker 1: tell us Sharon, what what is Rakutan? And you know,

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Speaker 1: why do we care about them?

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Speaker 3: So?

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Speaker 5: Racketan is really a conglomerate. It's one of the leading

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Speaker 5: e commerce and fintech players in Japan. But the reason

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Speaker 5: why I've been watching it closely is actually a fairly

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Speaker 5: new business. So it entered the domestic mobile market about

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Speaker 5: a couple of years ago and has really been struggling

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Speaker 5: there in terms of to gain market share, and they've

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Speaker 5: been making still they're still lost making after two years.

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Speaker 5: It's nowhere as big as soft Bank in terms of

438
00:22:47,680 --> 00:22:50,080
Speaker 5: you know, their bonds outstanding, but we have seen a

439
00:22:50,080 --> 00:22:53,199
Speaker 5: lot of volatility in their bonds, and that's because of

440
00:22:53,720 --> 00:22:59,160
Speaker 5: Rakuten's poor liquidity position. The company has just raised about

441
00:22:59,200 --> 00:23:03,080
Speaker 5: three trend billion yen of equity, but even so, their

442
00:23:03,119 --> 00:23:07,199
Speaker 5: five year CDs is currently at above five hundred basis points,

443
00:23:07,440 --> 00:23:10,520
Speaker 5: which is pretty much double soft banks even though they're

444
00:23:10,520 --> 00:23:11,840
Speaker 5: both rated double B by SMP.

445
00:23:12,440 --> 00:23:14,000
Speaker 4: So it's a fairly volatile name.

446
00:23:14,280 --> 00:23:15,639
Speaker 1: They have a ton of debt coming due over the

447
00:23:15,680 --> 00:23:17,960
Speaker 1: next few years, right, yes.

448
00:23:17,920 --> 00:23:18,160
Speaker 4: So.

449
00:23:19,880 --> 00:23:22,960
Speaker 5: I mentioned the the equity base. I think that should

450
00:23:23,000 --> 00:23:25,680
Speaker 5: tie them over until maybe sometime in twenty twenty four.

451
00:23:26,200 --> 00:23:28,680
Speaker 5: But then between mid twenty twenty four and mid twenty

452
00:23:28,760 --> 00:23:31,959
Speaker 5: twenty five, they've got over five billion dollars worth of

453
00:23:32,280 --> 00:23:35,439
Speaker 5: bonds coming due, and that was really the reason why

454
00:23:35,520 --> 00:23:37,439
Speaker 5: some of their bonds were trading at distress levels and

455
00:23:37,760 --> 00:23:42,760
Speaker 5: still are, and because the company is still free cash

456
00:23:42,760 --> 00:23:45,760
Speaker 5: flow negative due to the mobile losses, so they have

457
00:23:45,840 --> 00:23:49,640
Speaker 5: to rely largely on refinancing to meet these maturities.

458
00:23:50,320 --> 00:23:52,160
Speaker 1: Will they able to able to do that or will

459
00:23:52,200 --> 00:23:52,919
Speaker 1: they defaulte?

460
00:23:55,320 --> 00:23:57,920
Speaker 5: So I mean I mentioned earlier it's the leading e

461
00:23:57,960 --> 00:24:00,840
Speaker 5: commerce and fintech player, right, so it's hard to see

462
00:24:01,119 --> 00:24:06,960
Speaker 5: the company really defaulting because they do have good quality businesses. Ideally,

463
00:24:07,240 --> 00:24:10,520
Speaker 5: you know they've bought time to stabilize the mobile business

464
00:24:10,800 --> 00:24:13,440
Speaker 5: until say sometime in second half of twenty twenty four,

465
00:24:14,040 --> 00:24:16,399
Speaker 5: and the company is working hard on this. So ideally

466
00:24:16,440 --> 00:24:18,320
Speaker 5: you'd want them to stabilize the mobile business so that

467
00:24:18,400 --> 00:24:20,920
Speaker 5: the market feels better about them and they can refinance

468
00:24:21,000 --> 00:24:25,600
Speaker 5: the bonds that are coming due. In terms of the

469
00:24:25,600 --> 00:24:29,160
Speaker 5: mobile business, the issue here, I think is really their

470
00:24:29,200 --> 00:24:33,360
Speaker 5: poor network quality. So to give you some idea, even

471
00:24:33,400 --> 00:24:36,720
Speaker 5: after two years, Rocketan only has about two percent market share,

472
00:24:37,480 --> 00:24:40,520
Speaker 5: and I think generally the perception is that the network

473
00:24:40,560 --> 00:24:45,520
Speaker 5: quality is really subper compared to the incumbents. So Rocoton

474
00:24:45,640 --> 00:24:47,560
Speaker 5: is taking steps to do this. So, for example, it

475
00:24:47,600 --> 00:24:50,400
Speaker 5: came up with a new roaming agreement with KDDI, which

476
00:24:50,440 --> 00:24:54,880
Speaker 5: is the second largest mobile player in Japan, and it's

477
00:24:54,920 --> 00:24:58,440
Speaker 5: expanded the roaming to cover high traffic districts and major cities.

478
00:24:58,440 --> 00:25:01,680
Speaker 5: They removed speed cabs. I do think this would help,

479
00:25:01,920 --> 00:25:05,000
Speaker 5: but as we know, with a lot of consumer facing brands,

480
00:25:05,080 --> 00:25:10,040
Speaker 5: it takes a while to shift consumer's perspective. So you know,

481
00:25:10,040 --> 00:25:11,840
Speaker 5: we're going to watch the next few quarters but I

482
00:25:11,880 --> 00:25:15,080
Speaker 5: think it's still going to be slow going, but hopefully

483
00:25:15,080 --> 00:25:19,080
Speaker 5: that there would be some improvement. They've also cut mobile carepack,

484
00:25:19,200 --> 00:25:23,760
Speaker 5: so that should at least help reduce the cash fleet

485
00:25:23,800 --> 00:25:24,640
Speaker 5: in the near term.

486
00:25:25,240 --> 00:25:28,160
Speaker 1: And we should expect from them some liability management transactions

487
00:25:28,200 --> 00:25:30,840
Speaker 1: over the next few months or years.

488
00:25:31,800 --> 00:25:35,399
Speaker 5: So the equity definitely helps, right I mentioned that it

489
00:25:35,400 --> 00:25:38,200
Speaker 5: should tie them over until sometime in twenty twenty four.

490
00:25:38,880 --> 00:25:42,720
Speaker 5: The company is also still looking to sell assets. They've

491
00:25:42,760 --> 00:25:46,760
Speaker 5: been very active here. They listed rocketan Bank actually earlier

492
00:25:46,760 --> 00:25:48,600
Speaker 5: this year, when you know, the whole thing about Credit

493
00:25:48,640 --> 00:25:52,280
Speaker 5: Citizen Silicon Valley Bank was going on, so valuation was

494
00:25:52,320 --> 00:25:55,040
Speaker 5: lowered and expected, so they did raise some funds there.

495
00:25:55,560 --> 00:26:00,359
Speaker 5: They've sold some minority stakes. They've also sold the twenty

496
00:26:00,400 --> 00:26:05,919
Speaker 5: percent stake in Rocketense Securities to Mizuho. Going forward, what

497
00:26:05,960 --> 00:26:08,560
Speaker 5: they're trying to do is ipo Rocket and Securities as well,

498
00:26:08,960 --> 00:26:11,040
Speaker 5: but I think they might need to wait for the

499
00:26:11,080 --> 00:26:13,359
Speaker 5: market to recover somewhat so that the evaluation might be

500
00:26:13,440 --> 00:26:16,560
Speaker 5: closer to what they sold to Mizuho. They have another

501
00:26:16,600 --> 00:26:19,480
Speaker 5: eighty eight billion of investments on balance sheet which can

502
00:26:19,520 --> 00:26:23,160
Speaker 5: be sold, but again these amounts might be still small

503
00:26:23,320 --> 00:26:25,200
Speaker 5: compared to the bonds that are coming due.

504
00:26:25,640 --> 00:26:27,440
Speaker 1: And when you step back and look at the entire

505
00:26:27,600 --> 00:26:30,240
Speaker 1: capital structure, are their opportunities there for investors now or

506
00:26:30,280 --> 00:26:32,159
Speaker 1: should investors be very cautious? Do you think.

507
00:26:34,960 --> 00:26:36,879
Speaker 4: That's a that's a very tough question.

508
00:26:36,920 --> 00:26:41,000
Speaker 5: So in terms of the bonds that they have outstanding

509
00:26:41,040 --> 00:26:43,320
Speaker 5: in hard currency, they've got, you know, the twenty twenty

510
00:26:43,359 --> 00:26:45,879
Speaker 5: four late twenty twenty four bonds, senior bonds, they are

511
00:26:45,880 --> 00:26:51,160
Speaker 5: coming due, and they have some perpetual notes as well.

512
00:26:51,480 --> 00:26:54,359
Speaker 5: So I would say the perpetuals definitely are the higher

513
00:26:54,440 --> 00:26:57,880
Speaker 5: risk ones, you know, because they can defer these and

514
00:26:59,320 --> 00:27:02,440
Speaker 5: if you know, and the mobile business continues to struggle,

515
00:27:02,480 --> 00:27:05,360
Speaker 5: there's obviously a high risk that they might not call

516
00:27:05,440 --> 00:27:08,400
Speaker 5: this while while the senior bornes are structurally stronger.

517
00:27:08,640 --> 00:27:11,800
Speaker 1: Okay, great, So two big names to watch SoftBank and

518
00:27:11,960 --> 00:27:15,440
Speaker 1: Record ten. Thank you very much, Sharon Chen of Bloomberg Intelligence.

519
00:27:15,600 --> 00:27:18,280
Speaker 1: You can read all her great analysis on the Bloomberg terminal.

520
00:27:18,359 --> 00:27:20,359
Speaker 1: Do check it out and hope see you soon. Sharon.

521
00:27:21,040 --> 00:27:23,840
Speaker 1: Thanks James, and thanks again to look at the Pali

522
00:27:23,880 --> 00:27:26,880
Speaker 1: from Bloomberg News. Read all of his great distressed debt

523
00:27:26,920 --> 00:27:30,560
Speaker 1: scoops on the terminal and at Bloomberg dot Com. I'm

524
00:27:30,640 --> 00:27:33,480
Speaker 1: James Crombie. It's been a pleasure having you join us again.

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00:27:33,600 --> 00:27:35,200
Speaker 1: Next week on the credit edge,