Fiscal 2017 summary
The main theme in fiscal 2017 was the beginning of our full-scale transition of the role as holding company from “managing telecommunications business” to “making strategic investment”. For the Finance Unit meanwhile, it was a very busy year. I am proud that we have achieved solid results with respect to both financing and investment, which should enable us to facilitate the beginning of this major paradigm shift.
With a view to transitioning to a strategic holding company and in light of the near-term business environment, we undertook new financing, implemented refinancing, and restructured requirements of each financial transactions.
In fiscal 2017, SoftBank Vision Fund embarked upon full-scale investment activities. The total committed capital of SoftBank Group Corp. for SoftBank Vision Fund is $28.1 billion.*1 To fulfill this obligation, we employed a range of different financing methods in a carefully-planned manner, one of which was the issuance of U.S. dollar-denominated hybrid notes equivalent to approximately ¥500.0 billion. These hybrid notes are undated subordinated notes that are simultaneously eligible for treatment as 50% equity for the purposes of credit ratings and recorded as equity in the consolidated financial statements. Thus, we were able to raise a significant amount of funds while strengthening our creditworthiness. In addition, we undertook financing that effectively utilized Alibaba shares (non-recourse to SoftBank Group Corp.), which we used to fund acquisitions of certain assets that may be transferred to SoftBank Vision Fund.
Furthermore, in light of our current financial position, we were able to raise long-term funds from a broad range of investors, mainly in Asia and Europe, by issuing a total of ¥700.0 billion in U.S. dollar-denominated senior notes and euro-denominated senior notes (collectively referred to as Notes Issued in 2017). Also, we restructured the conditions of existing foreign currency-denominated notes. Specifically, we partially amended the covenants of foreign currency-denominated senior notes issued in 2015 to match those of Notes Issued in 2017. The aim of the amendment was to secure financial flexibility in preparation for the investment activities of SoftBank Vision Fund and the listing of the subsidiary SoftBank Corp. In addition, we extended the maturity of debts by refinancing the funds used for the acquisition of Sprint and Arm and others.
- *1As of March 31, 2018, This amount includes the use of Arm shares for the performance of an obligation that is equivalent to a contribution of approximately $8.2 billion.
In fiscal 2017, we invested actively worldwide. SoftBank Vision Fund and Delta Fund invested a total of $29.7 billion in an array of companies with the potential to lead their respective fields. I am pleased with this strong start, which includes such investments as NVIDIA, already generating significant unrealized gains. With respect to investments made outside the framework of the funds, the SoftBank Group acquired the investment firm Fortress, which invests diversely around the world, made a new investment in Uber, and further invested in DiDi.
Meanwhile, I often hear from investors that the share price of SoftBank Group Corp. is discounted as the SoftBank Group's current market capitalization is significantly below the total fair value of its investment asset shareholdings. In my analysis, the main reason for this is that we have not been able to show the actual performance which our series of recent large-scale investments will deliver returns to shareholders. We believe that we can narrow the discount by carefully explaining the returns expected to be generated by Sprint, which recently entered into a definitive merger agreement*2 with T-Mobile, Arm, and SoftBank Vision Fund, while making actual results.
- *2The transaction is subject to Sprint and T-Mobile stockholder approval, regulatory approvals, and other customary closing conditions. The transaction is expected to close no later than the first half of 2019. Upon completion of the transaction, the combined company is expected to become an equity method associate of the SoftBank Group, and Sprint will no longer be a subsidiary of the SoftBank Group.
Optimizing leverage as a strategic holding company
Despite the SoftBank Group's recent efforts to monetize its holding assets, it is still likely to be perceived as a corporate group with significant debt and interest payment burdens. Through continuous improvements, at one point we lowered the consolidated net leverage ratio*3 to about 1.0 times*4 from 6.2 times*4 in 2006, right after the acquisition of Vodafone K.K. Currently, however, the ratio is above 4.0 times,*5 reflecting the fact that our business scale is expanding again due to aggressive investments.This is generally considered a high level of debt.
Until now, the SoftBank Group's value has been assessed based on a business model in which the domestic telecommunications business and the holding company are integrated as a single entity. Going forward, SoftBank Group Corp. will perform the role of maximizing the SoftBank Group's enterprise value by enhancing the value of investees and creating synergies across the SoftBank Group. I believe this major change from a telecommunications business to an investment business will significantly change how our creditworthiness is evaluated.
Previously, the evaluation of the SoftBank Group's creditworthiness mainly reflected the leveraging of the domestic telecommunications business as the earnings of this business accounted for a large share of the consolidated financial results. Specifically, financial evaluations were based on cash generating capabilities, such as consolidated EBITDA and consolidated free cash flow. Going forward, as the investment business becomes central, the criteria for evaluating the SoftBank Group's creditworthiness will shift to the asset value of investees and the return on investment from dividends and asset disposal with additional consideration given to the net leverage ratio of the domestic telecommunications business.
Therefore, to guard against unexpected market fluctuations, we must be able to maintain safe, stable financial management. To realize impregnable financial management that can withstand all kinds of market volatility, we set 35% as a guide for the upper limit of the debt coverage ratio for the investment business. Meanwhile, for the debt attributable to the domestic telecommunications business, we evaluate the cash generation capabilities of SoftBank Corp. as a source of funds for repayments. The net leverage ratio of the domestic telecommunications business, which is the net interest-bearing debt*8 of SoftBank Corp. divided by its adjusted EBITDA, was 2.6 times as of March 31, 2018. We consider this an adequately safe level for a telecommunications carrier.
In addition to firmly managing the abovementioned two ratios, we conduct financial management that is resilient against sudden changes in market conditions by maintaining a cash position that is sufficient to redeem debts for at least the upcoming two years. At the Finance Unit, we will continue to pursue for the most optimum leverage that can maximize the enterprise value, while adhere to strict financial discipline.
- *3Net leverage ratio = net interest-bearing debt / adjusted EBITDA
- *4Japanese Generally Accepted Accounting Principles (JGAAP), including finance leases and preferred securities
- *5Cash position includes future proceeds from the sale of Supercell shares. Financial liabilities relating to the sale of shares by variable prepaid forward contract for Alibaba shares, net interest-bearing debt of SoftBank Vision Fund and Delta Fund, and net interest-bearing debt (deposits for banking business – cash position) of The Japan Net Bank are deducted from net interest-bearing debt. Of the funds procured through hybrid notes and the hybrid loan, 50% are treated as equity in the calculations.
- *6As of March 31, 2018. Financial liabilities relating to sale of shares by variable prepaid forward contract for Alibaba shares and net interest-bearing debt of the domestic telecommunications business, Sprint, Yahoo Japan (including The Japan Net Bank), Arm, and SoftBank Vision Fund and Delta Fund are excluded. Of the funds procured through hybrid notes and the hybrid loan, 50% are treated as equity in calculations.
- *7As of April 27, 2018. Exchange rate: $1 = ¥109.35
- *8Including funds equivalent to those for the acquisition of Sprint
Communicating with capital markets
I was appointed as a chief financial officer of SoftBank Group Corp. on April 1, 2018. Even as the SoftBank Group goes through the paradigm shift toward a strategic holding company, the Finance Unit will remain ready to take on the challenges of proactive financial management. What I mean by proactive is the realization of financing that is in lock-step with the direction and pace of the SoftBank Group's management strategy. Especially on the financing side, we must have expertise and insight in areas such as market dynamics, stakeholders' interests, and various financing schemes. At the same time, we will address investors' concerns that the SoftBank Group's business updates and strategies are hard to follow due to its rapid business development, by disclosing comprehensible information and explanations. It is important for us to explain the value of our investment assets and their returns, particularly through quality disclosure about SoftBank Vision Fund. As the indices that are central to our financial strategy have changed significantly, I am keenly aware of our responsibility to explain the new indices more carefully and thoroughly than ever before. Mindful that our financial strategy has moved onto a new phase corresponding to the SoftBank Group's organizational strategy, I will focus on enhancing dialogue with the capital markets to improve investor satisfaction levels with respect to disclosure and eventually an increase in the SoftBank Group's enterprise value will begin to realize.