Interesting read. For someone who has the time and patience to gather data against the author's arguments, I would highly recommend going to the source of the data. SoftBank's financials - FY 2018-19[1]. I had a quick skim at the segments of the company and they have some interesting sources of revenue/profit which could provide some cushion: ARM, SoftBank itself (telecom), Sprint!, Yahoo Japan.
Can someone more experienced than I am on financial matters check if they're in deep shit as the article suggests?
> Can someone more experienced than I am on financial matters check if they're in deep shit as the article suggests?
I'm no financial expert but "¥15.7tn ($143bn) of interest-bearing debt" is a lot of money, in case shit will end up hitting the proverbial fan (meaning a recession that will make refinancing a lot harder) then I don't see an easy way out for them. I also don't know what "¥27tn of total liabilities" really stands for, but that doesn't sound good either.
Adding those two numbers up gives you about $300 billion that is owed by SoftBank in one way or another (debt + liabilities), that is a lot of money that cannot easily be covered by SoftBank's current assets in case they'll become hungry for liquidity. And I don't think the biggest part of that sum has a long maturity (think 10, 20 even 30 years), probably most of it it's due in the next few years (even though I may be wrong on this one, I admit).
I was under the impression most if SoftBank's loans are denominated in JPY and have almost 0% interest. If you have $143Bn in interesting bearing debt at like 0.1% interest -- as long as you buy anything that will inflate at the normal rate of inflation -- you should make a killing, right?
Yeah, that would be the case for almost any big company whose finances are in order, but afaik SoftBank is not that open when it comes to how it really does stuff, so there’s a lot of guessing going on, and generally speaking guessing is not that good for investors when a recession hits, you want to know the real numbers and especially the real money flow, so to speak.
To go back to the available numbers: what would happen in case SoftBank needs to re-finance half of its loans in the next 5 years? What would happen if that need for re-financing is coupled with a recession that will most probably drive many of SoftBank’s assets’ value down? Will the Japanese banks be willing to roll that debt over in the midst of great need for liquidity? Debt which will stand against a lower value of SoftBank’s assets? We don’t really know.
In any case, what SoftBank is doing looks to me like “conglomerate financial engineering”, i.e. doing a lot of financial fuzzy stuff while apparently being backed up by solid assets, assets which are managed in a very Byzantine way. That works very well until it doesn’t, the latest such example being General Electric, which went from being among the 3 biggest companies in the world to one step from financial insolvency, all this in a matter of couple of weeks/one month, all this because of GE Capital.
I guess the next recession will show who was really right and who wasn’t.
Japanese banks have a habit of extending additional financing in order to avoid having to write down their assets even when borrowers are effectively insolvent. Extend and pretend, kick the can down the road.
Because funding costs for hedging cross currency trades have gone up ever since the Fed has started raising rates and largely reduced returns or in some cases even caused negative returns. Funding costs have exceeded rate hikes 1:1 and this has caused the foreign buyer base to drop sharply for UST.
This is why Apple took (takes) out billions of dollars in loans despite having nearly a $1 trillion market cap of which a significant portion is cash.
If you're a large corporation and have low-interest money offered to you, it's almost fiscally irresponsible not to take the loans.
Depends of the tax laws of your home country, of course, and I don't know anything about Japan. But in the US, if you were to get offered a 0.1% interest loan, take the money now and figure out what to do with it later.
Buffett and Munger have said that they are having difficulty investing cash because they have so much of it. In this case it seems irresponsible to take loans. I don't see the point unless it's a tax dodge.
For apple it was a tax dodge. A lot of the cash they had on hand was owned by offshore subsidiaries and if they moved it to U.S. company to pay out dividends or do a buyback that would trigger corporate taxation. So instead they borrowed against that cash hoping that the corporate tax rate would drop in the future and they could move the money and pay off the debt then.
I hear everyone saying this. It seems like 12-years of global QE is gonna cause a massive spike in inflation. Everyone's valuing things as if there's been hardly any inflation since 2007.
The reality is, there's 120% MORE narrow money (M1) today than there was in 2007. There's also 74% more board money (M3).
Has there ever been a long period (12 years, in this case) where we've had only ~25% inflation with ~120% growth in the money supply?
Naively, it seems like there's either too much money (not sure how you solve that) or everything is too cheap.
Well the main issue is all of this money is going to the wealthy. And while I don't have hard data to back this up, it feels like 'inflation' is rampant in the things that wealthy people throw money at, e.g. stock market, real estate, art, etc...
Buffett's subsidiaries still borrow money to build things like power stations and railways. He prefers to keep some cash so he can put it in high return ventures if they come up.
Like I posted below, 40% of SOFTBK's debt is in USD and they have been doing most of their larger issuance in USD recently. Bloomberg is showing that they have a weighted average coupon of 4.4% so they're not exactly paying 0%. Additionally, most of their debt is front loaded with a weighted average maturity of 2025. None of this points to them having a lot of time to sort things out or room for error.
Debt is a type of liability, so the second number already includes the first one. That said, their liabilities are ~3x their current market cap, and that’s assuming it is real, which the article argues is likely far from being the case. So if the portfolio valuation starts to really slide down, it’s unclear how they’ll be able to pay down the debt or convince new creditors to lend them more.
I didn't see it mentioned in the article but I think it's an important factor: The massive intervention by the BoJ in the corporate bond market of Japan. The BoJ is even buying bonds with negative yield. There's just so much Yen printed by the BoJ it's no surprise that some of it ends up in a venture capital fund, driving up valuations of startups around the globe. After all this is what everyone is warning about: Zero or even negative interest rates will distort valuations and capital allocation.
BoJ's money printing is dwarfed by Fed's and ECB's money printing. Japan has been doing it since 1989, Softbank cant be explained by Japan alone.
> Zero or even negative interest rates will distort valuations and capital allocation.
interest rates policy ( monetary ) has little to do with capital efficiency.
Central banks have rightly figured out a few things :
- Their respective countries have taken on too much debt, and we need to do something to reduce it.
- Market forces ( globalization + technology ) are having tremendous deflationary effects that is pushing down interest rates, their job is to find out that number.
> interest rates policy ( monetary ) has little to do with capital efficiency.
I don't know what you mean by capital efficiency. The BoJ corporate bond purchasing program lowers interest rates for all issuers on the Yen bond market, including the ones issued by SoftBank. Because SoftBank itself invests into the fund (around $28bn) and raised capital with bond issuance the link between BoJ open market interventions and startup valuations should be clear.
> Central banks have rightly figured out a few things :
> Their respective countries have taken on too much debt, and we need to do something to reduce it.
In the case of the ECB and the Fed (don't know about BoJ) the reason is actually the opposite. Fiscal expansion has been very unpopular politically in both the US and the EU (there mainly due to the fiscal austerity demanded by Germany). Because there was no political will to increase national debts, the central banks stepped in and started to directly purchase bonds (both governmental and private) in order to rekindle growth after the financial crisis. If governments started massive infrastructure projects or otherwise expanded their balance sheets, then this central bank intervention would have been much smaller. As a result of central bank interventions - which has reduced interest rates for gov. bonds - countries have started to issue more debt once again.
> Market forces ( globalization + technology ) are having tremendous deflationary effects that is pushing down interest rates, their job is to find out that number.
As far as I know there isn't a consensus for an explanation why the current low inflation environment persists (the "New Normal"). Globalization and technology might well be an explanation but global demographic shifts could also be an important factor (ageing populations and declining birth rates in most industrialized countries).
You are right, since 2013 BoJ has bee busy with the printing press.
> I don't know what you mean by capital efficiency. The BoJ corporate bond purchasing program lowers interest rates for all issuers on the Yen bond market, including the ones issued by SoftBank. Because SoftBank itself invests into the fund (around $28bn) and raised capital with bond issuance the link between BoJ open market interventions and startup valuations should be clear.
Soft Bank has assets that allows them to borrow, if Soft Bank didn't exist, somebody else would have taken advantage of the lower interest rate.
My point is that even when a lot of money is printed, capital goes to who is able to convince the bank the most. BoJ, Fed does not have much control in where the money is allocated.
> ... Because there was no political will to increase national debts, the central banks stepped in and started to directly purchase bonds ...
The problem here is that those bonds were about to lose a large amount of its value - as private debt repayment was not possible. So yes, private debt was high. CB's had no choice but to buy them , or else face a severe contraction in the money supply.
But that's the intent of rates that low, to try cause more activity for economic exploration to create or expand capabilities of businesses. The inflation only really becomes a concern if there is "too much" activity that yields too little lasting value creation. With too much being in quotes because that determination is a vastly complex and non-deterministic judgement call.
Softbank kind of reminds me of the Icelandic banks in the last bubble, in that in both cases I was wondering how they managed to get all the money they had.
Just before it all went off that time, these icelandic banks were buying up everything in sight, and I was thinking "where are these banks from a small country getting this kind of money"
Softbank seems similar, in that the scale of its funds is absolutely massive for a single company (vision fund one at $100b and suggestions of a second $100b vision fund in the offing). If there's a lot of fancy debt going on, it's the kind of that seems like it could blow up in spectacular fashion (as the icelandic banks did last time)
That and Softbank, at least from my limited visibility seems to throw money at a lot of startup like ventures in terms of the risk reward.
Maybe overall they're far more grounded than I see but I swear I only hear about them publicly when they're taking some risky chances that most probabbly won't pay off...
If they're borrowing I wonder who goes down with them?
There's a chart that says "Morgan Stanley caught red handed with a massive short book" - but isn't this exactly what they're supposed to do with the "greenshoe"? I.e., oversell the offering by taking a short position themselves, then buy it back later to move up the price?
> "SoftBank routinely selling assets to its Vision fund."
Can anyone help me understand the real reason Softbank does this and whether investors of VF are okay with it? One case I know of is Coupang [1], a Korean E-commerce company, recently "priced" by VF at $9B. Last year, Softbank sold its 20% shares in Coupang to VF at a 30% loss (down-valuation) and then VF poured in an additional $2B to Coupang. It appears Masa did double down on Coupang but why bother to sell its long position at a loss? Not a domain expert on this, so I wonder what is really going on...
I am curious if there are any counter-views published out there. Softbank is undeniably big and heavily invested in the VC basket. Is there public analysis on how well the larger entity is protected to down-valuation of their portfolio of startups?
>How SoftBank got here is a story as old as man itself.
You see, thanks to QE, pushing investors out the risk curve fanned the largest venture capital boom in all of history. Trust me, I know this. I built, then sold a VC firm because I could see what was happening.
I feel he's projecting his own experience setting up and flipping a small VC firm ("Between July 2012 and April 2016 led the investment of $35M into 32 early stage venture...") onto SoftBank.
Problem #1: Uber is already a public company and borrowing against owned stock in the company (as OP says Softbank is doing) isn't newsworthy. Article says $4bn from "Uber and two other SV groups". Even if we assume the entire $4bn is borrowed from Uber holdings, that's only 10% market cap of Uber.
Problem #2: Morgan Stanley shorting Uber for its IPO is more FUD. This is routine in the investment banking world. Underwriter knows they will have to do this to provide liquidity. Haven't seen a popular IPO in the last decade where the underwriter doesn't hedge.
Problem #3: Softbank having a large corporate debt load isn't that big of a deal since interest rates are so low (sometimes negative) in Japan. You're going to PAY me millions to borrow billions? Yes, I'll take that deal every day of the week. SoftBank makes enough in revenue to more than make up for their debt load.
Problem #4: I think everybody and their dog knows Uber, Lyft, WeWork, etc. are all overvalued and will struggle to find a path to profitability in the near term. However, we could still see a 30-50% drop in public valuations on those companies. But they make up a very tiny slicer of the overall venture capital in tech right now. The largest companies are tech and they're making money hand-over-fist. Microsoft is at a trillion dollar valuation but they make $35bn a year in profits and still have $130bn in cash in the bank. It's not systemic risk as in the GFC of 2008.
TLDR: SoftBank is starting to unwind their positions and you may see a dip in the valuations for Uber, Lyft, WeWork, Tesla, and other non-profitable tech companies.
When I read things like this, I start to wonder: when wealth inequality is discussed, how is it measured? I recall hearing that Jeff Bezos regularly loses billions due to fluctuations in Amazon stock. How much of the "wealth" in wealth inequality is actually based on paper gains? In other words, it seems that the richer you are, the more exposure you might have to the vagaries of the market. Maybe you are rich enough that you can afford to take that hit, but you will also likely lose more in dollars, I would assume.
one commonly used measure of inequality is the Gini coefficient, which isn't perfect but is great for getting a "big picture" view of things. The increased exposure of the rich to the vicissitudes of valuations doesn't really get accounted for, even in more detailed analyses. I'm guess that's because it would be horribly impractical to measure; you'd have to take a detailed look at the finances of almost everybody.
Semi related to this:
Have there already been noticeable changes in investments in the valley since the last big round of unicorn IPOs?
Since we can assume many VCs got a lot of cash back in a relatively short time I guess they will either double down and reinvest even more in tech/startups - or they will stay out of tech for the foreseeable future.
Or is it too early to tell because new funds would have to be set up first?
I'm not sure about new investments but I'd say that the author of OP's article is onto something here.
Softbank backed Lemonade is about to IPO in 6 months with a 2 billion dollar valuation. Neither their valuation nor an IPO makes sense to anyone in the industry. Lemonade is 99% marketing hype. Both the insurance book and the tech at the company are suspect at best.
The other one that's hit my radar recently is Compass, another Softbank backed company looking to IPO in the next 2 years at a stupid high (I've heard $5b) valuation. But they're cash flow negative with no path to profitability and they're increasing their spend rate instead of lowering it. So why would your average investor buy the stock?
Neither of those are mentioned in the article but it does seem like companies backed by Softbank are behaving pretty strangely.
Giving any entrepreneur $300m or $1b (in the case of Nuro) and not expecting "strange behaviour" would be weird.... that's private jet, Four Season suites for conferences with butlers, and Thomas Keller catering for company Xmas party type money.
Yes. One incident and a house of cards comes falling down. Too big to fail is one thing. Setting it up to fail is another. How did we get inflated valuations during the housing bubble. Fraudulent comps.
A large part of the Vision fund is arab money. For Americans, the investment strategy pursued by most of the Middle East can seem counterintuitive, or even stupid. But let me tell you a story.
I worked as a quant at a portfolio analytics firm and had access to the portfolio data of thousands of different funds: hedge funds, fund of funds, endowment funds, and sovereign wealth funds. Many of our clients were in the Middle East, probably due to the founder being Palestinian (I am also half Palestinian if it matters).
These national investment authorities have massive amounts of capital, larger than any hedge fund or endowment. We’re talking about trillions of dollars in a single fund invested all over the Western world.
With that kind of money, you need to pretty much invest in anything and everything. Billions in T-notes, corporate bonds, commodities, equities, whatever.
The amount that needs to be invested is so large that you need to invest in things no sane person with 50m would invest in. This is the purpose of the SoftBank Vision fund: to provide capacity for seemingly infinite Middle Eastern oil money. They desperately need to diversify out of their incredibly volatile oil cash flows.
This pressure results in a glut of arab money into VC and everything, because all they want is to create a true market portfolio. And by market portfolio, I mean allocations into everything: VC, PE, REITs, bonds, equities.
I wonder what the world would be like if (magically) the option for the top x% of people to invest their money globally was no longer available, and they were forced to find something to do with the money domestically. If wealth distribution is such that the masses lack the productivity and therefore income to buy your innovative product, perhaps then these top x% would be motivated to work together to influence society in a manner to increase individual productivity, which they could then make their larger-than-average rate of return on.
>We’re talking about trillions of dollars in a single fund invested all over the Western world.
I find that hard to believe. The Government Pension Fund of Norway is said to be the world’s largest sovereign wealth fund with just over US$1 trillion in assets.
Another one is "the term “corporate governance” is as foreign as that thing that came out of Sigourney Weaver’s stomach." The alien came out of Executive Officer Kane's stomach (John Hurt).
Also, the green new deal idea is not by Edward Markey and Alexandria Ocasio-Cortez. It was a term used by Thomas Friedman as far back as 2007 and the policy ideas have been bouncing around in more or less their current forms for quite some time.
Perhaps he is aiming this screed at arch conservatives who prefer the later films in the alien franchise.
obviously he is comparing the (lack of) transparency or clarity of the company with the (lack of) transparency or clarity of the Ethereum Casper protocol...
> But the real reason it’s as nutty as a AOC’s Green Deal ...
I hit this and immediately stopped reading the article. First, it's the "Green New Deal". Second, it's not solely AOC's work (though she is probably its most prominent proponent). Third, it's not nutty; it's, if anything, a down-payment on the work we need to do to address the climate crisis. Not to mention the rest of the article (up to that point) has nothing to do with the GND, so the author had to go out of their way to make themself look like an idiot.
You don't even need to analyze it that far to discard the article.
It doesn't matter whether we agree with the Green New Deal or not, the author is just outing themself as someone uninterested in looking beyond personal opinion and their political bandwagon.
Please do not stop reading just like that, you are missing opportunities to know and understand more.
If one only read what might fit their preconceived notions, one would live in an echo chamber, and be easily manipulated. Plus those preconceived notions will be harder to remove
I normally do not just stop like that, however the dig was so out of left field and so wrong it hit me like a cognitive segfault. If the sentence had been more germane to the topic at hand I probably would have continued on (though far more skeptical of the author's other points) but it was just too out of place for me to let slide.
As written, the bill, whatever you want to call it, is nutty. Specifically in implementation. While the idea behind it my not be nutty at all, its hard to call bs on that statement..
SoftBank is playing a game that is way above any hedge fund's pay grade, let alone some blogger.
- If SoftBank goes down, every coder loses his/her rice bowl. The pain inflicted on Son, Tim Cook and MBS is minimal, compared to your average tech worker.
- Valuation are not isolated beasts, the nominal value looks high because of the extraordinary financial alchemy that is going on the Fed. Large pool of capitals are betting the Fed is going to continue with QE4, QE5, .... QEn.
Imagine how it feels to be a sovereign wealth fund, watching the Fed print almost a trillion dollars / yearly in good times ! You must be terrified of what happens when the ball stops rolling.
- Owning growth stocks is an amazing way to hedge against many possible future outcome, both good and bad.
> If SoftBank goes down, every coder loses his/her rice bowl.
Maybe for silicon valley and money burning enterprises like uber.
>Imagine how it feels to be a sovereign wealth fund, watching the Fed print almost a trillion dollars / yearly in good times ! You must be terrified of what happens when the ball stops rolling
They are likely well diversified. They are anything but dumb money.
> They are likely well diversified. They are anything but dumb money.
I never said SWF are dumb money, in fact my argument is exactly the opposite. They are watching the Fed reduce their purchasing power through money printing and are rightly buying up growth stock as a way to maintain the value of their wealth.
His point is that their competitive salaries, regardless of their numbers, make other companies, with profit, up their offers a bit.
Instead of getting a small slice of the pie, we get a small slice plus a few percentage points (that perhaps we should already get). That's huge for most people that aren't financially independent or even close to it.
Yup, it's easy to spot a bubble but it's not easy to be able to tell how big it's going to get or when it's going to pop. You can be out by years and by magnitudes, which isn't useful for being able to profit from it. It's better to just plan for the worst and treat your exposure to the upside like a gamble.
I never traded long-dated options when I was in finance, but anything with longer than a three-month maturity was crazy expensive in terms of the spread you'd pay. These are not liquid instruments.
It's been a while since I've done the maths, but I'm pretty sure it'd be cheaper to buy shorter dated puts and roll them over on expiry. Which would still be very expensive.
Options are going to affect the returns so much in good times rhr insurance probably isn’t worth it.
A better idea would be to go long short, 30% short, and 100% long has always been popular. The leverage from the shorts lets you juice the long side while also giving you the 30% short protection. This should allow you to achieve a better Sharpe ratio than the market.
If you can’t get the leverage, consider buying a S&P ETF that has downside protection in exchange for capped returns.
A 60/40 equity/bond portfolio is going to underperform the market pretty significantly most years. Historically, 60/40 has outperformed the market slightly looking back 40-50 years.
Risk parity is probably a better idea and should give you recent returns with some downside protection. The problem is that rebalancing could be costly, you probably would only want to on a yearly basis.
But if you have access to leverage via shorts, I still think that’s the better play.
My personal investments do nothing of the sort though: I just go with a 3x leveraged S&P ETF. Annualized returns of around 20% year over year. Of course, I have massive exposure to volatility and market crashes. But in the five years of investing all of my money in this strategy, I’ve outperformed the S&P by over 80% :)
The past five years has been one of the best forming markets ever. I would not assume a strategy which worked well since 2014 will continue to do well until 2034.
Maybe it wouldn’t work if you are starting today, but I hsve enough returns built up that I should be able to experience a major depression and still beat the S&P. Assuming that the market doesn’t go down more than 33% in a day.
Why doesn't the government stops with QE already ?
With both houses prices inflating, and huge sums of money going into automation startups and investments, the future looks scary, for regular people.
Yes, automation will happen anyway. But why accelerate this very disruptive process(Although one that transfer a lot of power to the already powerful) ? Isn't it better to slow it and have it in a more controlled fashion ?
> It’s the classic Ponzi scheme. You always need fresh new capital to pay off the old capital in order for the scheme to continue. When there is no fresh new money, everything reverses and folks quickly realise the value of positive cashflow.
Capitalism as typically practiced works like a Ponzi scheme. It's not sustainable without someone, like a government or a standards body, setting boundaries. For example: Banks destroy economies without a government saying "you need to have x cash for y loans" and "you need to pay into this fund to insure you against bank runs."
here's a breakthrough for ya: telling people tediously obvious facts and assuming their position so you can condescendingly patronise them will not get you far in any economic system
Close. There are no incentives for a government or a standards body to malign profit for the sake of anything other than longer-term profit. So, capitalism does not work... in any configuration.
If regulation truly worked we would not be so fucked with regards to our rape of the Earth.
Can someone more experienced than I am on financial matters check if they're in deep shit as the article suggests?
[1]https://cdn.group.softbank/en/corp/set/data/irinfo/financial...
Edit: spelling mistakes /facepalm