How SoftBank/Sprint overcame rating uncertainty - UPDATE

Author: Ashley Lee | Published: 6 Aug 2013
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  • SoftBank issued a $3.3 billion dual-currency bond under Regulation S and Rule 144A in April to finance its acquisition of Sprint Nextel, which closed yesterday;
  • Although SoftBank was investment grade at the time of issuance, both S&P and Moody’s had put it on review for downgrade if the acquisition closed;
  • The covenant package had to reflect SoftBank’s investment grade credit status at the time of the issuance, but also its expected junk status once the deal closed;
  • A negative pledge clause contained exemptions specific to telecom companies, and ensured that SoftBank would be able to maintain its growth.

SoftBank’s financing of its acquisition of Sprint Nextel, which closed yesterday, set a precedent as a quasi-high-yield Japanese credit.

The $21.6 billion paid by the telecoms company for a 70% stake in the US’ third-largest wireless operator, plus the potential for competing bids, made it one of 2013’s highest-profile deals.

The deal was part-financed by a $3.3 billion Reg S/Rule 144A dual-currency offering in April. But deal counsel had to contend with rating agency warnings that they would downgrade SoftBank to sub-investment grade following the deal’s completion.

This had to be accounted for in the notes’ covenant package. A further complication was the lack of a large high-yield market for Japanese issuers. Deal counsel Kenji Taneda, of Morrison & Foerster, said this meant there wasn’t a lot to work with in terms of local precedents.

"So this being a quasi-high-yield deal in Japan was in and of itself an important milestone," he added.

Further, this acquisition is seen as an indication of SoftBank’s international ambition. Peggy Furusaka, vice president and senior credit officer of Moody’s Corporate Finance Group, said that the acquisition of Sprint could be a sign that Mr. Son is interested in SoftBank to become a global telecommunications company.

"It has done well in the domestic market and has established a position to maintain that stability going forward," she said. "Now SoftBank is facing a new challenge." 

Further reading

Softbank’s investment into Sprint Nextel explained

Third arrow of Abenomics to challenge M&A

AsiaCo term loan B deals expected to continue

The financing

The $3.3 billion dual-currency offering, denominated in euros and US dollars, was issued in April, although it was not contingent on the Sprint acquisition.

The $2.49 billion US offering has a fixed coupon of 4.5% and a seven-year tenor. The €625 million euro tranche was sold with a coupon of 4.625% and a seven-year tenor. Both were rated BBB by Standard & Poor’s (S&P) and Baa3 by Moody’s.

Both agencies had put SoftBank on notice for downgrade because of the large amount of debt that the transaction would incur. They warned the Japanese company would be downgraded if the transaction was completed.

Following final regulatory approval on Monday, S&P cut SoftBank’s rating by two notches to BB+.  

On July 18, Moody’s downgraded SoftBank from Ba1 to Baa3 with a stable outlook.

However its press release warned that the ratings agency viewed that its debt-financed acquisition of Sprint would significant financial flexibility and considered the possibility that SoftBank would need to extend additional finance to help Sprint execute its largest capital expenditure programme of $16 billion for 2013 and 2014. 

Covenant package for potential downgrade

What?

The bonds were issued with the understanding that the company would be downgraded from investment-grade to high-yield if the deal were to complete.

The covenant package had to reflect the company’s investment grade rating at the time, plus its subsequent downgrade to a junk rating when the Sprint acquisition closed.

Why?

Morrison & Foerster’s Andrew Winden said the package was designed on the premise SoftBank would win its bid to acquire sprint, meaning its credit would decline.

But he took an optimistic view about the company’s future, adding that there was also the belief that it would soon return to investment grade. Therefore there are provisions for the covenants to fall away at that point.

Ultimately, he said, the set of covenants were tailored for the situation – an issuer between investment-grade and non-investment grade.

"I would say that the covenants are even wider than a traditional cov-lite package, reflecting both the company’s current situation and its ability to very successfully sell that package to investors," he added.

Negative pledge clause

Definition of 'relevant indebtedness’

What?

A negative pledge clause means the company and note guarantors will not incur or accept a lien on any kind of relevant indebtedness, Winden said.

But the definition of 'relevant indebtedness’ was designed to fit SoftBank’s needs. Winden said it is defined in a manner that excludes leases: typically the definition of indebtedness in connection with a bond offering would include leases in the negative pledge against liens and other forms of security of property.

Why?

This is an especially important distinction for telecom companies, whose business activities often require tailored covenants in bond offerings.

"We excluded leases because they’re such an important financing tool for telecommunications companies, particularly those with a lot of towers – they will lease towers rather than owning them outright – so that was a very important covenant to reflect the necessities of the issuer," Winden said.

Ability to incur additional debt

What?

There is a negative pledge limitation on the provision of secured rights against the assets of the issuer and the note guarantors. But Winden noted that the covenants do not impose any limitations on incurring additional debt, which is important so that the business can continue growing.

Why?

There are limitations on the ability of non-guaranteeing subsidiaries to incur indebtedness above a certain amount, he explained. But some subsidiaries are excluded from this limitation, including SoftBank’s public subsidiaries.

The exclusion of SoftBank’s public subsidiaries from the limitation to incur indebtedness up to a certain amount allows them to maintain their growth without being constrained by the parent company’s debt covenants.

What the deal means for the market

The financing will be a useful precedent particularly in the telecoms industry and for companies that have multiple business operations, some of which are meant to support the borrowing and some that are not.

But it is unclear whether this deal will encourage Japanese issuers – particularly high-yield credits – to access US capital markets for acquisition financing.

Until this year, the largest foreign currency denominated bond deal by a non-financial institution in Japan was Takeda Pharmaceutical’s $3 billiion issuance last year in connection with its acquisition of Nycomed.

"There have certainly been discussions about conducting similar debt financings in connection with acquisitions, but the question is how many of these are likely to be high yield," said Taneda.

Asian-Pacific corporates – particularly Australian credits – have been active in the US’ term loan B market, although those deals are primarily to refinance existing loans.

But Japanese companies in particular are experiencing M&A uncertainty due to the yen’s recent volatility. Although further outbound acquisitions are expected, high-yield financing may be especially challenging in the near future because of fluctuating foreign exchange rates.

The telecommunications sector in particular may not see more of these mega-acquisitions. Furusaka noted that her understanding is that NTT DoCoMo will maintain its domestic focus, and probably won’t look to acquisitions at the same level of SoftBank.

Of course, she added, there could be interest on a smaller scale: telecommunications businesses are looking, but into the content business and at acquisitions at a more managed size. 

Tear sheet

Softbank’s $21.6 billion 70% stake in Sprint closed yesterday, July 10 2013.

Softbank financed the deal through a $3.3 billion Reg S/Rule 144A dual-currency offering which closed in April 2013.

Deutsche Bank was global coordinator, while the bookrunner group on the dollar tranche comprised Bank of America Merrill Lynch, Credit Agricole, Mizuho, Morgan Stanley and Nomura. Banks bookrunning the euro-denominated tranche were Credit Agricole, Mizuho and Nomura.

Morrison & Foerster advised SoftBank on US law, while Mori Hamada & Matsumoto served as Japanese law counsel.

Latham & Watkins advised Deutsche Bank as global coordinator and underwriters Bank of America Merrill Lynch, Credit Agricole, Mizuho, Morgan Stanley and Nomura.

See also:

Softbank’s investment into Sprint Nextel explained

Third arrow of Abenomics to challenge M&A

AsiaCo term loan B deals expected to continue