Invest1 publisher2 min readPublished
SoftBank pays a B- price for BB+ paper to fund its OpenAI investment
More than $20 billion of orders came in against an $11 billion target. The yields that pulled them in sit 2.20 percentage points above the BB-zone dollar average and 25 basis points above the B- average.
The Investor · Invest desk
What happened
- Bloomberg reported more than $20 billion of demand in the book-building for SoftBank Group's speculative-grade bonds, against a target of $10 billion in dollar debt and 1 billion euros.
- Yields were set at 8.75% to 8.875% on the 3.5-year notes, 9.375% to 9.5% on the 5.5-year and 9.75% to 9.875% on the 7.5-year, all record highs among SoftBank's dollar bonds.
- Analysts quoted in the briefing attributed the investor interest to those record-high yields.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- cost Paying 2.20 points over the BB-zone average costs about $242 million a year on $11 billion, and that money services the bond instead of funding the acquisitions the proceeds are also meant to cover.
- contradiction A book nearly twice its target looks like appetite for the OpenAI trade, but the explanation offered for the orders is the yield level, so the size of the book tells you what price clears and little about the borrower.
- constraint Locking 7.5-year money at 9.75% fixes the financing cost of the OpenAI position for the rest of the decade, whatever the stake turns out to be worth.
- precedent A BB+ issuer clearing at B- levels sets the reference price for the next borrower that arrives with a concentrated AI equity bet to finance with debt.
Price the 3.5-year tranche against the rating and the comparison tightens. Its 8.75% floor is 25 basis points above the 8.5% average yield on B- rated bonds in the US market [9][15], while S&P Global and Fitch both put SoftBank at BB+, the highest rung below investment grade [7]. The BB-zone dollar average in Bloomberg's index is 6.55% [8]. The deal therefore cleared 2.20 points wide of its own band [12], and slightly beyond the band five steps down.
Some of that is the curve rather than the borrower. Market rates have been climbing after the European Central Bank, then the Federal Reserve and the Bank of Japan, raised policy rates in succession [11]. Some of it is maturity: inside the same deal, the step from 8.75% at 3.5 years to 9.75% at 7.5 years costs a full percentage point for four more years of money [16].
Some of it is what the money buys. Proceeds go toward a $65 billion investment in OpenAI and toward mergers and acquisitions [10]. At $11 billion the notes cover roughly a sixth of that commitment, which leaves about $54 billion to come from somewhere else [18][20]. On the full amount at the 8.75% floor, interest runs near $963 million a year [14].
The coverage ratio is the softest number here. More than $20 billion of orders against an $11 billion plan is about 1.8 times [17], and orders in a book-build are indications that get scaled back at allocation. The account reports yield ranges and the planned size, not final pricing [19].
In my view the premium is credit pricing, and buyers are being paid to hold a fixed claim against a concentrated equity bet. The counter is placement: a $10 billion dollar tranche plus 1 billion euros [3] is a lot of paper to move while policy rates are rising [11], and large new issues come cheap to get done. Secondary trading will separate the two. If the notes trade inside 8.75% soon after they settle, the extra yield bought a fast book, and the analysts who attributed the demand to the record-high yields [6] were describing a concession.
What to watch
- Final size and pricing against the $11 billion plan: an upsized deal at the tight end would say the concession was too generous.
- Any rating action from S&P Global or Fitch once the notes are outstanding, given the market is already pricing SoftBank at B- levels.
- How SoftBank funds the remaining $54 billion of the OpenAI commitment, and at what cost.