Here is much more from Wolf Street:
This scheme worked wonders for a while but has now run into trouble, and a lot is at stake.
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
The biggest force behind the startup bubble in the United States has been SoftBank Group, the Japanese publicly traded conglomerate. It has been the biggest force in driving up valuations of money-losing cash-burn machines to absurd levels. It has been the biggest force in flooding Silicon Valley, San Francisco, and many other startup hot spots with a tsunami of money from around the world — money that it borrowed, and money that other large investors committed to SoftBank’s investment funds to ride on its coattails. But the scheme has run into trouble, and a lot is at stake.
The thing is, SoftBank Group has nearly $100 billion in debt on a consolidated basis as a result of its aggressive acquisition binge in Japan, the US, and elsewhere. This includes permanently broke Sprint Nextel which is now trying to merge with T Mobile. It includes British chip designer ARM that it acquired in 2016 for over $32 billion, its largest acquisition ever. It includes Fortress Investment Group that it acquired in 2017 for $3.3 billion. In August 2017, it acquired a 21% stake in India’s largest e-commerce company Flipkart for $2.5 billion that it sold to Walmart less than a year later for what was said to be a 60% profit. And on and on.
In May 2017, Softbank partnered with Saudi Arabia’s Public Investment Fund to create the Vision Fund, which has obtained $97 billion in funding – well, not actual funding, some actual funding and a lot of promised funding, which made it the largest private venture capital fund ever.
Saudi Public Investment Fund promised to contribute $45 billion over the next few years. SoftBank promised to contribute $28 billion. Abu Dhabi’s Mubadala Investment promised to contribute $15 billion. Apple, Qualcomm, Foxconn, Sharp, and others also promised to contribute smaller amounts.
Over the past two years, the Vision Fund has invested in over 80 companies, including WeWork, Uber, and Slack.
But the Vision Fund needs cash on a constant basis because some of its investors receive interest payments of 7% annually on their investments in the fund. Yeah, that’s unusual, but hey, there is a lot of unusual stuff going on with SoftBank.
Some of this cash to make the interest payments was obtained from selling the stakes in Flipkart and Nvidia, but SoftBank, according to Reuters, had to borrow the rest of the money to fund these interest payments.
So we’ll call this monster the Vision Fund 1 because there is now the Vision Fund 2.
S&P and Moody’s both rate SoftBank Group one step into junk, and have said they’re more likely to downgrade SoftBank, than to upgrade it, because of its debt.
This debt and the credit ratings are important factors because they put a limit on how much the company can borrow to meet its cash needs, such as those for funding the interest payments of the Vision Fund 1, and to fund the initial investment into the Vision Fund 2.
SoftBank Group has promised to put $38 billion into the Vision Fund 2, but where is this money supposed to come from?
Other investors have not been gung-ho about the Vision Fund 2, and no big investor has stepped forward with commitments, only some smaller investors have, according to two sources that talked to Reuters.
The Saudi Public Investment Fund doesn’t have that kind of moolah at the moment, sources told Reuters, not until after it sells some big assets or until after Aramco’s long-delayed IPO, which is still not on the horizon.MUCH MORE
The Abu Dhabi’s Mubadala Investment still intends to plow money into the Vision Fund 2 but is trying to obtain more say in the investments, a source told Reuters.
So, for now, the fund has just the threadbare pledge from SoftBank to put $38 billion into Vision Fund 2 though SoftBank doesn’t have that money, and may not be able to obtain that money, and everyone knows that.
Softbank is also facing the WeWork fiasco where it has the choice of throwing several more billions at it to keep WeWork alive long enough for an eventual IPO at a much lower valuation, or let it go to heck, and its $10 billion along with it. The money SoftBank plowed into Uber may also not be returning anytime soon....
HT to ZeroHedge but rather than that link we've got another Softbank story from earlier this year.
"Something is not quite right with SoftBank"
Additionally, SoftBank investee WeWork was out looking for a few billion dollar line of credit.
Shades of another disruptor, Sam Insull, leverage at the holding company level, leverage at the operating company level, leverage all the way down...
The leverage in all this, with Softbank lending money to Son and other Softbank employees to invest in Vision Fund 2 and the margining of assets is eerily familiar to folks who know the Insull story.
