Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: We're very pleased to have with us on the show.
Speaker 1: Luk At de Powley, who covers distressed debt for Bloomberg
Speaker 1: News in London, thanks for joining us, Thanks for having me.
Speaker 1: We're also delighted to welcome Sharon Chen from Bloomberg Intelligence
Speaker 1: in Singapore. We'll be coming back to Sharon and a
Speaker 1: little bit to talk about SoftBank, a big name that
Speaker 1: everyone's watching. So do stay with us. But first, Luc
Speaker 1: at the Powley with Bloomberg News, you've been digging deep
Speaker 1: into distress debt. There's a lot of it about. Let's
Speaker 1: talk about your latest scoop. A sixty four billion dollar
Speaker 1: pile of debt from some of the biggest companies has
Speaker 1: suddenly come to light. It was hidden, you found it.
Speaker 1: What's the story there?
Speaker 2: Luca So a colleague and I have been through all
Speaker 2: of the latest file from the US where many companies
Speaker 2: have for the first time disclosed using arrangements called supplier financing.
Speaker 2: Supplier financing is effectively a form of financing where you
Speaker 2: pay your suppliers later, often with the help of a
Speaker 2: financial intermediary or a bank, and by doing so, you
Speaker 2: increase the amount of cash that you have. You basically
Speaker 2: suspend your liabilities for a period of time, and you
Speaker 2: end up being more cash rich as a result. They
Speaker 2: were forced to disclose it by FASBY, which is the
Speaker 2: body that is basically in charge of accounting rules in
Speaker 2: the US, and similar rules will come into effect for
Speaker 2: other companies around the world. But this is the first
Speaker 2: time we've had a really good look at how many
Speaker 2: companies use this and how aggressively they use it, and
Speaker 2: I think we were kind of surprised by how many
Speaker 2: companies were doing it and.
Speaker 3: The amount of supply chain financing that was going on.
Speaker 1: So then just break it down for supply of finance,
Speaker 1: you kind of describe it, But how does it work?
Speaker 1: In really basic terms? Do I do I get someone
Speaker 1: to supply something to me and I'd pay them later,
Speaker 1: and then in the interim, I'm cash rich because I
Speaker 1: actually have the money myself. But what's the story? Yeah,
Speaker 1: I'm not, I understand.
Speaker 2: So the most the most like basic way I like
Speaker 2: to think about it is if you've got a supermarket
Speaker 2: and a supermarket has you know, there's a hypothetical supermarket
Speaker 2: has suppliers.
Speaker 3: Let's say that they're farmers.
Speaker 2: And the original idea of this was that the farmers
Speaker 2: might want to get paid in sort of ten days
Speaker 2: or immediately, but the payment terms from you know, the supermarket,
Speaker 2: so someone like a Tesco in the UK or a
Speaker 2: Walmart in the US, you could reduce the amount of
Speaker 2: time that it took for that payment to be made
Speaker 2: by getting a bank to come in between and pay
Speaker 2: the supplier earlier. So the farmer, rather than waiting ninety
Speaker 2: days for the eggs is given, he can get it
Speaker 2: in ten days and he pays a small discount, he
Speaker 2: gets paid sorry, a small discount by the lender, and
Speaker 2: then a lender gets paid in full when the invoice
Speaker 2: is actually due. That's sort of like the most sort
Speaker 2: of vanilla and basic form of supplier financing and a
Speaker 2: hypothetical example, but it's been taken to sort of new
Speaker 2: and extreme heights based on the stuff that we've seen
Speaker 2: disclosed in the reports, to sort of you know, far
Speaker 2: longer payment terms and you know, an altogether different transaction
Speaker 2: than the one I described there.
Speaker 1: So in basic terms, it's just like a bridge. You
Speaker 1: I need something from somebody, the bank will come in
Speaker 1: and just bridge that transaction, offering money to the supplier.
Speaker 2: Yeah, so the supplier supply gets paid early, they take
Speaker 2: a small hit depending on the discount rate the prevailing
Speaker 2: interest rate, and then they can get their money quicker,
Speaker 2: which is what a lot of them want. Yes, so
Speaker 2: that's the basic idea, but it's been sort of it's
Speaker 2: gone a little bit more extreme than that in the
Speaker 2: past or ten years.
Speaker 1: And what kinds of companies were talking about? You mentioned Tesca,
Speaker 1: but are we talking about big household names in the US.
Speaker 2: So, yeah, I mean we're talking about Philip Morris, We're
Speaker 2: talking about Signa, which is an insurance company, a lot
Speaker 2: of auto parts companies, Doctor Pepper, curic A Cure, Doctor Pepper,
Speaker 2: even a really large sway that different companies Boeing around
Speaker 2: seventy or eighty that we found inside the S and
Speaker 2: P five hundred. I'm sure if we expanded our universe
Speaker 2: and looked through even more ten ques, then we could
Speaker 2: maybe find some more. But my colleague Nicola White and
Speaker 2: I are pretty fed up of looking through them, to
Speaker 2: be honest, so we might just stick with.
Speaker 1: Those but so you talk about it's getting more extreme.
Speaker 1: It's not just let me a million dollars for a
Speaker 1: week or something. It's now gone out much much further.
Speaker 1: So it's real like long term. What's the term we're
Speaker 1: talking about.
Speaker 2: Yeah, So, I mean, it's not really totally clear from
Speaker 2: the filings that we have, so FASBIS compelled companies to
Speaker 2: give a certain amount of information, but not as much
Speaker 2: information as some people would have liked. So we have
Speaker 2: some idea of how long some programs are, but there
Speaker 2: are quite a few that seem to go to three
Speaker 2: hundred and sixty days, which, when you think about it,
Speaker 2: is a crazy payment term to accept. Effectively, supplier is
Speaker 2: saying like, I'm happy to be paid in three hundred
Speaker 2: and sixty days, and then a financing party comes between
Speaker 2: them and could pay them earlier. But you know, you
Speaker 2: think about that as sort of like that's basically what
Speaker 2: they've agreed to. It's kind of a crazy thing for
Speaker 2: the supplier to agree to. And then on the other side,
Speaker 2: what that can do is create this sort of debt
Speaker 2: debt like whatever you want to call it, effect where
Speaker 2: people are you know, suspending their payables for longer and
Speaker 2: then for increasing the amount of cash that's generated the
Speaker 2: company despite not you know, that not being due to
Speaker 2: anything organic sales or something like that.
Speaker 3: Effectively, if you think about it.
Speaker 2: For yourself, you were you know, if you could delay
Speaker 2: all of your liabilities, your mortgage or whatever by a year,
Speaker 2: you'd have more cash, but you wouldn't actually be richer.
Speaker 2: And that's effectively what a lot of companies seem to
Speaker 2: have done here. So yeah, it's more extreme than I
Speaker 2: would have anticipated. And the financing is a lot longer
Speaker 2: than sort of what you'd normally associate with something in
Speaker 2: the accounts payable line in a set of companies accounts.
Speaker 2: It's not sort of invoices waiting to get paid. It's
Speaker 2: three hundred and sixty days long.
Speaker 1: And just so people understand what is FASBE you mentioned
Speaker 1: that earlier.
Speaker 2: FASB is basically the body that looks after accounting regulation
Speaker 2: in the US, so they govern us GAP so that
Speaker 2: they're in charge of instituting new rules, and this is
Speaker 2: one of the new rules the instituted actually interestingly at
Speaker 2: the behest, at least in part of ratings agencies who said, like, look,
Speaker 2: we don't have enough disclosure around this sort of debt,
Speaker 2: like line item. We need more disclosure because if we
Speaker 2: don't have it, then we can't rate these companies properly,
Speaker 2: you know, and a lot of the ratings agencies have.
Speaker 3: Been trying to sort of guess around this for a while.
Speaker 3: You know.
Speaker 2: I have general rules that like anything beyond ninety days
Speaker 2: should be considered sort of debt, and anything less than that,
Speaker 2: you know, it wouldn't be considered debt for the company
Speaker 2: with the supplier of financing program. But yeah, that's sort
Speaker 2: of the why this has come up now. The industry
Speaker 2: itself has been growing for years and years and years.
Speaker 2: But the reason that we wrote the story now is
Speaker 2: because the first time we've got a decent data set,
Speaker 2: and we don't have everyone a lot of companies haven't
Speaker 2: reported yet.
Speaker 3: We've got a decent data set.
Speaker 2: We can see roughly how big this form of financing is,
Speaker 2: and it's pretty big, but.
Speaker 1: It could be more than sixty four billion dollars.
Speaker 2: Yeah, so I mean it's really hard to know. I mean,
Speaker 2: there is there are some trade bodies who try and
Speaker 2: take a stab at how big supply chain finance is.
Speaker 2: One figure from a sort of a trade publishing house
Speaker 2: called BCR. They reckon the two point two trillion dollars
Speaker 2: of supply chain finance was issued globally last year. It's
Speaker 2: just a sort of you know, that's a poll for
Speaker 2: people within the market that they've done, and it's not
Speaker 2: always totally clear. You know, it's not an easy number
Speaker 2: to get a hold of, but that's a huge amount
Speaker 2: of financing, and I don't think it's sort of impossible
Speaker 2: based on what we found and what's still like a
Speaker 2: relatively small subsection of companies.
Speaker 1: But the companies we've talked about Philip Morris, TESCA, I mean,
Speaker 1: they're not companies that are in trouble at all. They've
Speaker 1: got cash, they can you know, this is just like administration.
Speaker 1: Really it doesn't seem like a problem. But when could
Speaker 1: it be a problem?
Speaker 2: Does it?
Speaker 1: Does it become an issue for weaker companies when credit
Speaker 1: gets tied? I mean, how does it all unravel in
Speaker 1: the worst case scenario?
Speaker 3: Yeah? Sure. So.
Speaker 2: One of the problems I have is because I'm a
Speaker 2: distressed debt reporter, everyone sort of panics when I bring
Speaker 2: him up.
Speaker 3: And I don't think that's like necessarily the case here.
Speaker 2: I don't think, you know, people are going to you know,
Speaker 2: fall apart under the weight of the supply chain financing programs.
Speaker 2: But you do have some pretty, you know, sizable examples
Speaker 2: where supply chain financing has played a really important role,
Speaker 2: not so much in the US, but definitely in Europe.
Speaker 2: So I think it's still the UK's biggest bankruptcy ever
Speaker 2: was Karellian and Karellion collapsed almost instantly.
Speaker 3: In twenty eighteen. I think it was, yeah, twenty eighteen.
Speaker 2: When a lot of a lot of the reason that
Speaker 2: it was so leveraged and its leverage was kind of disguised,
Speaker 2: was because it was using supply chain financing really aggressively.
Speaker 2: So rather than coming up in their sort of debtline
Speaker 2: of their accounts, it came up in their accounts payable.
Speaker 2: An analyst kind of knew something was going on, but
Speaker 2: they didn't have a really good idea of, you know,
Speaker 2: quite how leverage this company was. In the UK, generally
Speaker 2: companies go into administration and then you know, restructuring advisors
Speaker 2: come in and try and find a solution for the company. Here,
Speaker 2: the company just went straight into liquidation because there was
Speaker 2: no recovery to be at. It was just, you know,
Speaker 2: they basically one of the best recoveries they've had. We
Speaker 2: still don't know the number is issuing the order to
Speaker 2: signed off on a lot of this stuff. Then there's
Speaker 2: a company called ab and Goer which had several brushes
Speaker 2: with insolvency over the years, like a Spanish company which
Speaker 2: did some creative accounting. There was you know, there was
Speaker 2: some supply chain finance there. And then the example that
Speaker 2: people talk about a lot is green Sill, which although
Speaker 2: really the problem with green Sill was kind of more
Speaker 2: exotic than supply chain financing and more to do with
Speaker 2: you know, future receivables or whatever. That was one of
Speaker 2: the businesses, you know, one of the businesses they operate,
Speaker 2: and certainly the business they were most vocal about was
Speaker 2: you know, doing supply chain financing for big companies like.
Speaker 3: General Mills or Vodaphone.
Speaker 2: So, yeah, like it has been a problem in the past,
Speaker 2: and I guess the real issue is, like if you
Speaker 2: got into a situation where banks were less likely to
Speaker 2: give you credit, this is something they can pull immediately.
Speaker 2: It's not like a facility. It's not like a loan
Speaker 2: or a bond where you have a maturity and you
Speaker 2: know you've got this capital until a certain date and
Speaker 2: then you're got to pay it back. This can just
Speaker 2: be pulled pretty much whenever, depending on you know, the
Speaker 2: specific contracts, which you know, I'm not really privy to.
Speaker 2: This is mostly almost entirely uncommitted as far as I
Speaker 2: can tell. And that's kind of a risky sort of
Speaker 2: thing to happen with have within the capital structure, because
Speaker 2: you know, if all of a sudden you've got to
Speaker 2: accelerate all of those liabilities you've extended for three hundred
Speaker 2: and sixty days, you're going to find yourself incapable of
Speaker 2: doing that. In a lot of cases, you know, do
Speaker 2: you have a revolving credit facility that can cover that?
Speaker 3: Do you have cash in your bank account that can
Speaker 3: cover that? Maybe not?
Speaker 2: And in a ties of credit market, it's you know,
Speaker 2: while it doesn't seem like it's likely to happen to,
Speaker 2: you know, these big companies that we've been talking about,
Speaker 2: it seems likely they could happen to someone as a
Speaker 2: bank step back from lending to corporates.
Speaker 1: And you mentioned rating agencies. Is it a ratings issue
Speaker 1: that some of these bigger companies liable to a downgrade
Speaker 1: because of the stuff you.
Speaker 2: Think potentially, but it's it's a hard one because how
Speaker 2: you characterize this is still pretty hard to do based
Speaker 2: on some of the disclosures. I mean, we've spoken to
Speaker 2: a number of people from from raising's agencies and you know,
Speaker 2: interested investors, and they say like, well, there's just not
Speaker 2: really enough disclosure to make, you know, sort of hard
Speaker 2: and fast, like Okay, we think that there's actually a
Speaker 2: few more turns of leverage on there, so we're going
Speaker 2: to knock you down a notch or whatever. But I
Speaker 2: think I think it, Yeah, it's quite feasible that it
Speaker 2: will happen to someone of the hundreds of companies which
Speaker 2: are going to have to report this over the next
Speaker 2: few years, as you know, the rules outside of the
Speaker 2: US get implemented as well. So yeah, that that is
Speaker 2: a real possibility. And the other thing that is going
Speaker 2: to happen is credit is not only becoming more scarce,
Speaker 2: but as a result being more scarce is getting more expensive.
Speaker 2: And one of the things that we're starting to see
Speaker 2: happen is like suppliers who remember in this transaction, actually
Speaker 2: bear the cost of the financing. They're the ones who
Speaker 2: get paid earlier for you know, a smaller amount than
Speaker 2: what they're owed are looking at instead of like, you know,
Speaker 2: oh it's only a couple of percent or whatever. With
Speaker 2: the way rates have gone up recently, are now looking
Speaker 2: at a far larger chunk of their invoices being spent
Speaker 2: on financing for.
Speaker 3: You know what.
Speaker 2: Although may be sort of like helping the supplier, is
Speaker 2: also in a lot of cases definitely helping the larger company,
Speaker 2: which is sort of an interesting roundabout way of financing yourself, right.
Speaker 1: And the bank's going to be making a lot of
Speaker 1: money on this.
Speaker 2: Yeah, I mean it was. It's not a very risky
Speaker 2: form of lending. It's as I say, we don't have
Speaker 2: all the contracts for all the different for all the
Speaker 2: different agreements that are with the parties.
Speaker 3: But I would wager.
Speaker 2: That you know, they're in a pretty good position. Nobody
Speaker 2: really wants to sort of renege on their debts. It's
Speaker 2: very short term, so it's sort of you know, you've
Speaker 2: got that sort of you're temporally senior at some people
Speaker 2: like to say you're at the front of the queue
Speaker 2: because you're the first people who are going to you know,
Speaker 2: get paid out of a company. So so yeah, it's
Speaker 2: considered like quite unrisky in a lot of cases. There
Speaker 2: are also examples of people who buy this as investors,
Speaker 2: not just the banks that are doing it, but from
Speaker 2: people I've spoken to in the market. A lot of
Speaker 2: this is done by sort of the corporate banks of
Speaker 2: a particular company, you know, the sort of relationship banks.
Speaker 2: They're the ones who are providing the financing. And yeah,
Speaker 2: it's probably sort of a fairly unrisky way to provide
Speaker 2: credit to the suppliers. But you know, also to an extent,
Speaker 2: the larger company with the with the program.
Speaker 1: Great stuff. Luk at Appali from Bloomberg News, thank you
Speaker 1: so much for joining us. Thank you read all of
Speaker 1: lucas scoops on the Bloomberg terminal and of course at
Speaker 1: Bloomberg dot com. Moving on to another big topic. As
Speaker 1: I mentioned earlier, we're very fortunate to have with us
Speaker 1: Sharon Chen, who covers a whole load of things infrastructure, telecoms,
Speaker 1: utilities across Asia for Bloomberg Intelligence based in Singapore. How's
Speaker 1: it going over there, Sharon?
Speaker 4: Great? James, how are you very well?
Speaker 1: Thank you thanks for joining us. So there are a
Speaker 1: number of names that we're going to focus on in particular,
Speaker 1: but before we do. What's the mood on the ground
Speaker 1: over there are people upbeat about the economy where you are.
Speaker 5: I think Singapore is obviously a bit more exposed, but
Speaker 5: I think Southeast Asia there's a lot of talk about
Speaker 5: southeas Asia in general being a safe haven, you know,
Speaker 5: if you know the global economy slows down.
Speaker 1: Okay, interesting, So let's start with a big one that
Speaker 1: you cover. Soft Bank. We hear about them all the time.
Speaker 1: The news isn't always good. First of all, let me
Speaker 1: ask what is soft Bank? Why are they so important?
Speaker 4: So?
Speaker 5: SoftBank is a very high profile investment holding company that's
Speaker 5: focused on investing in startups in the technology sector. So
Speaker 5: it's always making headlines right in terms of what they're
Speaker 5: investing in, whether it's we work, whether they're trying to
Speaker 5: IPO arm and in the credit space in particular. It's
Speaker 5: a very bond issuers. So they've got about forty billion
Speaker 5: dollars of bonds outstanding, and that's why I'm very, very
Speaker 5: focused on this company.
Speaker 1: So that's one of the biggest issues. They're based where
Speaker 1: in Japan?
Speaker 4: Yes, it's based out of Japan.
Speaker 1: Okay. They were recently downgraded. There was lots of news
Speaker 1: about that what led to a weakening credit credit profile
Speaker 1: at the bank.
Speaker 5: So S and P downgraded to double B. Moodies has
Speaker 5: it at BA three with negative outlook. I guess this
Speaker 5: is going back a bit. But back in twenty twenty
Speaker 5: one we saw soft Bank really ramp up investments through
Speaker 5: SoftBank Vision Fund too. And obviously, starting from last year
Speaker 5: we've seen rising interest rates and all the technology stops
Speaker 5: come under pressure. More recently, we've got Silicon Valley Bank
Speaker 5: collapsing and that has reduced liquidity for all these startups.
Speaker 5: So the soft Bank Vision Fund has really wracked up
Speaker 5: some investment losses in the past year. It was about
Speaker 5: thirty eight billion dollars worth of investment losses, and so
Speaker 5: SoftBank has had to sell some of its other better
Speaker 5: quality assets to shore up its balance sheet. Is liquidity,
Speaker 5: and you know, it used to own close to I
Speaker 5: think twenty percent of Ali Baba and now they've monetized
Speaker 5: almost everything and that's by far the strongest. So the
Speaker 5: portfolio quality for SoftBank has has really suffered in the
Speaker 5: past couple of years.
Speaker 1: Interesting, So what's the near term risk shown? Is it manageable?
Speaker 4: Yes?
Speaker 5: Actually so, even though it's just been downgraded. The company
Speaker 5: is actually in a fairly good position at least in
Speaker 5: the next couple of years. It's got about thirty billion
Speaker 5: dollars worth of cash, it has proven that it has
Speaker 5: good funding access, especially to the Japanese yend market, and
Speaker 5: it's also lowered it's adjusted loan to value to twenty
Speaker 5: four percent, so that's a fairly healthy level.
Speaker 1: And what are we looking for next? There's an IPO
Speaker 1: in the works. Can you talk a bit about that
Speaker 1: and how it will affect them?
Speaker 5: Yes, so I mentioned earlier an IPO of ARM. So
Speaker 5: ARM is chip designer, and you know, if you've been
Speaker 5: following the news and VideA and some of the other
Speaker 5: chip companies out there have really rallied very strongly because
Speaker 5: there's so much excitement about AI in general, and so
Speaker 5: there was some consens about execution risks just given the
Speaker 5: IPO market hasn't been the strongest this year. But you know,
Speaker 5: looking at how some of their peers are doing, I
Speaker 5: would I believe the company could be in a position
Speaker 5: to IPO And it's target is by the end of this.
Speaker 1: Year, So what happens after that? Are they going to
Speaker 1: increase investments? They can do share buybacks, so you know.
Speaker 4: All thatse being equal.
Speaker 5: Obviously the rm IPO would be positive, right, it would
Speaker 5: lower LTV, it would improve liquidity and also the portfolio quality.
Speaker 5: But then I don't expect software to really sit on
Speaker 5: a mountain of cash and not do anything right. So
Speaker 5: the company has been that if you follow their earnings
Speaker 5: called previously they keep talking about being in a defensive mode,
Speaker 5: but now in the latest one they do talk about,
Speaker 5: you know, there could be potential opportunity out there, and
Speaker 5: they are in a good position to you know, pivot
Speaker 5: away from the defense mode when they see the right opportunity.
Speaker 5: So the question I think from a credit perspective is
Speaker 5: how fast will soft Bank ramp up their investments, you know,
Speaker 5: because you know the macro backdrop isn't isn't the strongest yet,
Speaker 5: so that's one thing to watch. SoftBank is also prone
Speaker 5: to doing a lot of large share buy bags, so
Speaker 5: that could be another use of proceeds, and obviously if
Speaker 5: they use some of the process to repay that, that'll
Speaker 5: be great.
Speaker 1: And the medium to long term and they've got a
Speaker 1: large portion of the portfolio and startups within the soft
Speaker 1: Bank Vision Fund. What's going on.
Speaker 5: There so I mentioned earlier they've sold off Ali Baba
Speaker 5: if they did ramp up investment and division funds. So
Speaker 5: if you look at the portfolio now compared to pre COVID,
Speaker 5: pre COVID, I think Ali Baba, which is rated single
Speaker 5: A is made up about half of soft Bank's portfolio,
Speaker 5: and now that's close to almost zero, and you've got
Speaker 5: soft Bank Vision Fund at about forty percent of the portfolio.
Speaker 5: Majority of these are unlisted, less mature companies and obviously
Speaker 5: higher risks, especially if you're compared to the likes of
Speaker 5: Ali Barber. So there's just less visibility in terms of,
Speaker 5: you know, how they can realize some of you know,
Speaker 5: monetize some of these assets in the future. And the
Speaker 5: other thing that has been happening is there's been quite
Speaker 5: a few senior management changes in software in the past
Speaker 5: couple of years and could potentially we could potentially see
Speaker 5: some you know, shifts and investment strategy. That's another uncertainty.
Speaker 5: I mean, there's been talk about soft Bank looking at
Speaker 5: private credit, for example, which is a brand new area
Speaker 5: for the company.
Speaker 1: Is that a good thing for them? And we hear
Speaker 1: so much about it. I'm based in New York, obviously,
Speaker 1: and we hear we hear about private credit being the
Speaker 1: big new thing. I mean, what what what does soft Bank?
Speaker 1: You know, what's their edge in private credit?
Speaker 5: Well, so, as I mentioned before, they haven't really done it,
Speaker 5: but obviously I think they would leverage their know how
Speaker 5: and their expertise in the technology sector already to branch
Speaker 5: into this this mark. So we'll have to see how
Speaker 5: how they fare, because it sounds like that it's getting
Speaker 5: quite competitive.
Speaker 1: Definitely. Yeah. Okay, So the other company we're going to
Speaker 1: talk about Rakuten, also in Japan, another very interesting situation.
Speaker 1: But before we dig into the details, just let us know,
Speaker 1: tell us Sharon, what what is Rakutan? And you know,
Speaker 1: why do we care about them?
Speaker 3: So?
Speaker 5: Racketan is really a conglomerate. It's one of the leading
Speaker 5: e commerce and fintech players in Japan. But the reason
Speaker 5: why I've been watching it closely is actually a fairly
Speaker 5: new business. So it entered the domestic mobile market about
Speaker 5: a couple of years ago and has really been struggling
Speaker 5: there in terms of to gain market share, and they've
Speaker 5: been making still they're still lost making after two years.
Speaker 5: It's nowhere as big as soft Bank in terms of
Speaker 5: you know, their bonds outstanding, but we have seen a
Speaker 5: lot of volatility in their bonds, and that's because of
Speaker 5: Rakuten's poor liquidity position. The company has just raised about
Speaker 5: three trend billion yen of equity, but even so, their
Speaker 5: five year CDs is currently at above five hundred basis points,
Speaker 5: which is pretty much double soft banks even though they're
Speaker 5: both rated double B by SMP.
Speaker 4: So it's a fairly volatile name.
Speaker 1: They have a ton of debt coming due over the
Speaker 1: next few years, right, yes.
Speaker 4: So.
Speaker 5: I mentioned the the equity base. I think that should
Speaker 5: tie them over until maybe sometime in twenty twenty four.
Speaker 5: But then between mid twenty twenty four and mid twenty
Speaker 5: twenty five, they've got over five billion dollars worth of
Speaker 5: bonds coming due, and that was really the reason why
Speaker 5: some of their bonds were trading at distress levels and
Speaker 5: still are, and because the company is still free cash
Speaker 5: flow negative due to the mobile losses, so they have
Speaker 5: to rely largely on refinancing to meet these maturities.
Speaker 1: Will they able to able to do that or will
Speaker 1: they defaulte?
Speaker 5: So I mean I mentioned earlier it's the leading e
Speaker 5: commerce and fintech player, right, so it's hard to see
Speaker 5: the company really defaulting because they do have good quality businesses. Ideally,
Speaker 5: you know they've bought time to stabilize the mobile business
Speaker 5: until say sometime in second half of twenty twenty four,
Speaker 5: and the company is working hard on this. So ideally
Speaker 5: you'd want them to stabilize the mobile business so that
Speaker 5: the market feels better about them and they can refinance
Speaker 5: the bonds that are coming due. In terms of the
Speaker 5: mobile business, the issue here, I think is really their
Speaker 5: poor network quality. So to give you some idea, even
Speaker 5: after two years, Rocketan only has about two percent market share,
Speaker 5: and I think generally the perception is that the network
Speaker 5: quality is really subper compared to the incumbents. So Rocoton
Speaker 5: is taking steps to do this. So, for example, it
Speaker 5: came up with a new roaming agreement with KDDI, which
Speaker 5: is the second largest mobile player in Japan, and it's
Speaker 5: expanded the roaming to cover high traffic districts and major cities.
Speaker 5: They removed speed cabs. I do think this would help,
Speaker 5: but as we know, with a lot of consumer facing brands,
Speaker 5: it takes a while to shift consumer's perspective. So you know,
Speaker 5: we're going to watch the next few quarters but I
Speaker 5: think it's still going to be slow going, but hopefully
Speaker 5: that there would be some improvement. They've also cut mobile carepack,
Speaker 5: so that should at least help reduce the cash fleet
Speaker 5: in the near term.
Speaker 1: And we should expect from them some liability management transactions
Speaker 1: over the next few months or years.
Speaker 5: So the equity definitely helps, right I mentioned that it
Speaker 5: should tie them over until sometime in twenty twenty four.
Speaker 5: The company is also still looking to sell assets. They've
Speaker 5: been very active here. They listed rocketan Bank actually earlier
Speaker 5: this year, when you know, the whole thing about Credit
Speaker 5: Citizen Silicon Valley Bank was going on, so valuation was
Speaker 5: lowered and expected, so they did raise some funds there.
Speaker 5: They've sold some minority stakes. They've also sold the twenty
Speaker 5: percent stake in Rocketense Securities to Mizuho. Going forward, what
Speaker 5: they're trying to do is ipo Rocket and Securities as well,
Speaker 5: but I think they might need to wait for the
Speaker 5: market to recover somewhat so that the evaluation might be
Speaker 5: closer to what they sold to Mizuho. They have another
Speaker 5: eighty eight billion of investments on balance sheet which can
Speaker 5: be sold, but again these amounts might be still small
Speaker 5: compared to the bonds that are coming due.
Speaker 1: And when you step back and look at the entire
Speaker 1: capital structure, are their opportunities there for investors now or
Speaker 1: should investors be very cautious? Do you think.
Speaker 4: That's a that's a very tough question.
Speaker 5: So in terms of the bonds that they have outstanding
Speaker 5: in hard currency, they've got, you know, the twenty twenty
Speaker 5: four late twenty twenty four bonds, senior bonds, they are
Speaker 5: coming due, and they have some perpetual notes as well.
Speaker 5: So I would say the perpetuals definitely are the higher
Speaker 5: risk ones, you know, because they can defer these and
Speaker 5: if you know, and the mobile business continues to struggle,
Speaker 5: there's obviously a high risk that they might not call
Speaker 5: this while while the senior bornes are structurally stronger.
Speaker 1: Okay, great, So two big names to watch SoftBank and
Speaker 1: Record ten. Thank you very much, Sharon Chen of Bloomberg Intelligence.
Speaker 1: You can read all her great analysis on the Bloomberg terminal.
Speaker 1: Do check it out and hope see you soon. Sharon.
Speaker 1: Thanks James, and thanks again to look at the Pali
Speaker 1: from Bloomberg News. Read all of his great distressed debt
Speaker 1: scoops on the terminal and at Bloomberg dot Com. I'm
Speaker 1: James Crombie. It's been a pleasure having you join us again.
Speaker 1: Next week on the credit edge,