SoftBank’s Alibaba holding in spotlight amid stock market turmoil

The turmoil in Chinese tech stocks is dampening the financial firepower of Japan’s SoftBank 9984 -0.06%

Group Corp. wants to make new investments and start a debate about whether it could sell part of its huge stake in Alibaba BABA -1.88%

Group Holding AG

The Nasdaq Golden Dragon China Index of US-listed Chinese stocks is down 52% in the 12 months ended Friday. Alibaba is down 49%, and Tokyo-listed SoftBank is down 40%.

Declining valuations on its holdings have brought SoftBank close to its self-imposed debt limit of 25% LTV, estimated David Gibson, a senior research analyst covering Japan’s internet sector at MST Financial in Australia. That would impose limits on new borrowing, investments and share buybacks, Mr Gibson said.

Mr. Gibson pointed to SoftBank’s Vision Fund, which includes holdings such as Didi Global inc,

whose US-listed shares are down more than 70% from their asking price of $14 last summer. “SoftBank is now constrained by capital, and not just because of Alibaba’s market cap decline, but also because of the Vision Fund,” he said.

Founder Masayoshi Son has said that SoftBank’s loan-to-value ratio, or net debt divided by the equity value of its holdings, should typically be 25% or less. S&P Global Ratings announced in March that SoftBank will keep the ratio around 30% by adjusting the pace of investment in its funds business.

Investors have been vigilant for signs of late that SoftBank might sell some of its nearly 25% stake in Alibaba. SoftBank posted a profit of $558 million for the last three months of 2021 after Mr. Son used a “tiny chunk” of Alibaba stock to settle contracts.

“SoftBank may need to sell more of these [its] Alibaba shares because they have a lot more funding needs going forward,” said Atul Goyal, a technology, games and telecoms analyst at Jefferies. A SoftBank spokeswoman declined to comment on public holdings.

In its bid to fund new investments, Mr. Son’s company has already raised tens of billions of dollars in recent years, backed by shares in the Chinese e-commerce giant and some of SoftBank’s other publicly traded holdings, while it has a full sale prevented.

This so-called asset-backed financing, which uses a mix of derivatives and loans, demonstrates SoftBank’s openness to bold and sometimes complex financial arrangements. The numbers don’t impact the loan-to-value ratio, which reflects traditional debt.

From April to December 2021, SoftBank announced it had raised $6.9 billion net in asset-backed financing using Alibaba stock. It has also raised funds against its holdings in T-Mobile US inc,

Deutsche Telekom Inc

and SoftBank Corp., the company’s telecommunications subsidiary.

Overall, asset-backed financing using Alibaba stock was valued at the equivalent of about $25.8 billion at the end of 2021, SoftBank said last month, representing about 35% of its Alibaba stake.

Funding is provided partly through margin loans and partly through prepaid futures contracts. The contracts are agreements in which banks or brokers pay SoftBank upfront and agree to settle the obligation later, either in stock, cash, or a mix.

The deals could be one way SoftBank is reducing its stake in Alibaba. However, they’re not committing SoftBank to selling any shares in the future, and how it decides to liquidate it could depend on issues like its liquidity and Alibaba’s share price.

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Some deals set floor prices for shares used to settle the contract, while others set both a minimum and a maximum. A recent SoftBank presentation said that using forwards “hedges me against a stock price drop below the floor price.”

Alibaba’s contribution to SoftBank’s total net asset value has fallen sharply, to 24% in December 2021, down from a peak of 60% in September 2020. The figures exclude Alibaba shares, which were used to raise funds.

Alibaba headquarters in Hangzhou, China.


Photo:

Qilai Shen/Bloomberg News

Despite the pullout, Alibaba remains one of the most successful investments for SoftBank, which began in 2000 with a $20 million investment in the Hangzhou, China-based company. “I think Alibaba is still a great company,” Mr. Son said in February.

Recent intervention by Chinese policymakers to restore market confidence and a move by Alibaba to ramp up its buyback program to a record $25 billion have helped the Chinese company’s shares recover most of their year-to-date losses.

write to Dave Sebastian at dave.sebastian@wsj.com

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