Where SoftBank goes, hyperscalers follow

SoftBank Group, the global investment holding company, has lessons for the top US tech firms as they seek to hyperscale their businesses through vast capital expenditure funded through capital markets.

It’s not an odd comparison. Although the Japan-headquartered company is predominantly a tech sector investor, it can be directly compared with the hyperscalers at the forefront of AI technology development and infrastructure build-out.

That’s because SoftBank can be perceived as the original hyperscaler when it comes to mustering funding at scale and pace in pursuit of its vision.

Facebook parent Meta, Google’s holding company Alphabet and Amazon all boast far higher credit ratings, while SoftBank Group’s BB+/A from S&P and JCR put it closer to the new bond market entrant SpaceX.

	SoftBank Group	Alphabet	Amazon.com	Meta	Oracle	SpaceX
Moody's	—	Aa2	A1	Aa3	Baa2	Baa1
S&P	BB+	AA+	AA	AA-	BBB-	BBB+
Fitch	—	—	AA-	—	BBB	BBB
JCR	A	—	—	—	—	—

But those ratings should not deter a closer look into how SoftBank has scaled its funding. This first materialised through the securitization market and then moved to bond issuance in various currencies and formats.

Indeed, its lower ratings compared with pure tech companies offer insights into how SoftBank has diversified funding sources, leading to its preparation for a mega return to the Japanese retail market.

SoftBank has come a long way from its roots as a software distribution company when it was founded in 1981. Now, it has turned into a major name in venture capital investments, but to do so it has relied heavily on the capital markets.

It did its first major fpiece of unding in late 2006 when it put its SoftBank Mobile subsidiary through a whole business securitization.

The ¥1.45tr deal was used to refinance its acquisition of Vodafone’s Japanese mobile phone business, which it bought in March that year, and which later gave SoftBank a foothold in the cash generative telecom sector.

Though the yen now trades at a historically weak level against the dollar, that deal size is still substantial even at today’s exchange rate, representing just over $9bn. But, at the time, the transaction was equivalent to well over $12bn.

Subsequently, credit markets have grown to accommodate ever larger deals and bigger investor demand, as evidenced by the recent wave of hyperscaler issuance. And over the years, SoftBank has been combing through various bond markets well before the modern tech companies accelerated their issuance.

Before going global, SoftBank had regularly hit its home market to raise yen funding through a mixture of bonds and loans. While it has been issuing institutionally-targeted yen bonds, its retail-targeted deals have been particularly notable.

The brand gained strong household status thanks to its advertisements in the mobile phone sector for its subsidiary. This recognition later helped position it as an investment company even among retail investors.

Taking advantage of its huge name recognition, SoftBank has grown its access of the yen institutional and retail bond markets over the years to raise huge funding volumes, seemingly unperturbed by its credit ratings.

This has now culminated in the latest offering, an expected sale of up to ¥1tr ($6.3bn) of bonds — a record.

That symbolic size is the maximum amount SoftBank indicated it was preparing to issue in Japan through a seven year retail bond when it filed a preliminary bond prospectus on Monday. It is showing a preliminary marketing range for a coupon of 4.3%-4.9%.

At the full size, the deal will rank as the largest ever yen bond offering, matching NTT Finance's past ¥1tr institutionally-targeted sale.

The new proposition appears attractive for local buyers when compared to domestic government debt. With the 0.8% September 2033 JGB yielding above 2.55% as of Tuesday this week, Softbank would offer at least 155bp more.

Granted, Japan has been a bond market stronghold for decades. Local investors have long had an affinity for fixed income products, ranging from equity-linked structured Uridashi bonds to the now more common, simpler interest rate linked yen or dollar callables. On top of that, they have strong recognition of the SoftBank name.

Accessing that market is not something feasible for just any issuer, and certainly not in this kind of size.

But what the Hyperscalers share with SoftBank is name recognition. Many of these companies are already household brands that are well-known all over the world.

This is relevant not only in Japan — should Alphabet, for example, decide to return after completing the largest foreign yen bond through its May institutional foray — but also in other major bond hubs.

Of course, SoftBank’s lower ratings compared with the US tech companies would typically mean it would have to pay a higher yield. But foreign issuers also often pay a premium over domestic names, including in the yen market.

Moreover, retail investors tend to be more inelastic and sticky with their orders. Even at the higher end of the proposed marketing range, the 4.9% coupon is not that far from where SoftBank printed a ¥260bn 5.12% 35 year non-call five hybrid to institutional demand in June.

However, SoftBank’s issuance across markets, and especially formats, could also offer other hyperscalers food for thought.

This has a particular resonance now that the US treasury secretary Scott Bessent has cautioned that the tech companies’ funding blitz has turned into competition with the US government’s borrowing at the long end of the curve.

As the 30 year Treasury yield last week reached a 19 year high, breaching 5.3%, Bessent said the government will start buying back old, long dated paper. But he also looked further afield at hyperscalers’ long end borrowing in the dollar market, noting that it was putting more pressure on long end rates. He even suggested those companies should be funding with “belly debt”.

Under the US treasury’s scrutiny, and in the middle of a capex wave, hyperscalers may find guidance in what SoftBank has done.

While the securitization route may be highly unlikely at group level, such issuance may prove more feasible at subsidiary level should any of these companies choose to diversify their funding. Indeed, it is becoming an established route for data centre operators to raise cash.

Naturally, the bond market is most often the cheapest funding option. But with their spreads and absolute yields ticking higher amid concentrated supply from the sector, SoftBank’s past funding choices could provide guidance.

This is because even more relevant is SoftBank’s previous ventures in the hybrid market at a time when the tech companies have shown they are not afraid to raise equity. Alphabet demonstrated its willingness to deploy fresh equity, the most expensive form of capital, when it launched a $90bn combined equity financing in June, ahead of SpaceX’s IPO that raised $85bn.

And aside from its yen hybrid earlier this year, SoftBank also issued a triple tranche hybrid capital deal in dollars and euros in October last year. Both were in currency markets where some US hyperscalers have already ventured.

Wherever the hyperscalers looks for cash, they could do far worse than look to Soft bank's example.