SoftBank's Vision Funds Report Historic $27 Billion Loss

While the unraveling of ARK (and its flagship fund ARKK in particular) have come to epitomize the unraveling of the pandemic-era tech boom, Cathie Wood and company are rank amatures compared with Masa Son and SoftBank, who have seen their portfolio of rising tech firms hammered by the trifecta of global economic contagion: Rising rates in the US, China’s COVID-inspired lockdowns (and before that, Beijing’s crackdown on Chinese tech) and the fighting in Ukraine (and the inflationary hellscape that rising oil and food prices have unleashed).

We noted back in March that SoftBank’s portfolio had seen $25 billion evaporate. Since then, the bleeding has only worsened.

To wit, SoftBank’s two Vision Funds have posted historic investment losses of ¥3.5 trillion ($27.5 billion) over the 12 months to March 31 as the funds’ biggest holdings were pummeled by rising interest rates and Beijing’s crackdown on the tech sector.

These losses helped drive Masayoshi Son’s conglomerate as a whole into its biggest-ever quarterly net loss of ¥2.1 trillion ($16.3 billion). Shares in the group closed down 8% on Thursday ahead of company’s dour earnings report, tumbling to their lowest level in nearly two months. Meanwhile, for the year ended March 31, the Vision Fund swung to a loss of ¥2.64 trillion ($20.5 billion), compared with a ¥4.03 trillion profit in the previous year.

As we have reported many times before, the situation for SoftBank is much more dire than for ARK, because Masa Son’s entire fortune is underwritten by SoftBank’s debt-to-loan ratio. You see, it wasn’t enough for Masa Son to invest his considerable fortune into emerging tech startups (remember, SoftBank has styled itself as nothing less than the “conductor of the AI revolution”). He decided to leverage up, using Softbank shares as his stock in trade, which leads us to this, SoftBank’s loan-to-value ratio.

The company maintains that its LTV ratio has been “strictly maintained” below 25% for the last three years. But when additional borrowing is included, it’s closer to 30%, says Jefferies analyst Atul Goyal. Last month, the company’s main lender, Mizuho, spoke out to say it was “unconcerned” about SoftBank’s ability to pay down its debt, and the company claims it has enough cash on hand to pay bond redemptions for at least the next two years.

Source: SoftBank

Among SoftBank’s biggest losses include Didi, the Chinese ride-hailing giant which has seen its shares crumble to a fraction of their former value, and South Korean ride-hailing giant Coupang.

During Thursday’s presentation, Masa Son started off by playing”defense” (as he put it): toward the beginning, there was a slide entitled “Concerns about SoftBank?” which addressed questions about his (and the company’s) debt load, the decline in his equity holdings and his cash position.

Source: SoftBank

But during the presentation, he also spoke about his preference for playing “offense”.

“In terms of personality, I do like to play offense,” said Son. But with the “pandemonium” of COVID and war in Ukraine, he understands now is the time to play defense. “When it rains, you open an umbrella,” he said.

Son clarified that SoftBank’s “safe driving” in recent months had solidified its financial position. He explained in a slide that the company has allocated 2.9 trillion yen of cash, or roughly twice the 1.3 trillion yen due for bond redemptions in fiscal 2022 and 2023.

Amusingly, in its earnings report, SoftBank insisted that its earnings remain strong, and that its loan-to-value ratio had actually improved over the past quarter.

“The investment environment remains challenging, dominated by fast-rising inflation, increasingly complex geopolitical risk and a global energy shock,” said SoftBank. “Our conviction in the AI revolution remains strong; in the quarter we made 43 new investments.”

But as we mentioned above, this is actually questionable.

Among SoftBank’s many problems: it is heavily exposed to crackdown in China, thanks to its 25% stake in Alibaba, the e-commerce group founded by Jack Ma, which has come under increasing regulatory scrutiny (although the COVID pandemic has forced the CCP to shelve its “shared prosperity” crackdown…at least for now).

Fortunately for Masa Son, we imagine that if Japan’s most visible national champion actually does experience a liquidity crisis, the BoJ – which has shown few qualms about buying up Japanese equities – would be more than willing to step in.