SoftBank’s Alibaba Stake in the Spotlight Amid Stock Market Turmoil

The turmoil in Chinese tech stocks is dampening Japan’s financial powerhouse.

soft bank

9984 -1.75%

Group Corp. has for new investment and sparked a debate over whether it could sell some of its huge stake in

alibaba

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Holding Group Ltd.

The Nasdaq Golden Dragon China Index of US-listed Chinese stocks is down 52% for the 12 months through Friday. Alibaba is down 49% and Tokyo-listed SoftBank shares are down 40%.

Falling valuations of its holdings have pushed SoftBank close to its self-imposed debt limit of 25% loan-to-value ratio, estimated David Gibson, a senior research analyst covering the Japanese internet sector at MST Financial in Australia. That would imply limits on new loans, investments and share buybacks, Gibson said.

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

DidiGlobal INC.,

whose US-listed shares have fallen more than 70% from their $14 offering price last summer. “SoftBank is capital-constrained now, and that’s due not only to Alibaba’s declining market capitalization, but also to the Vision Fund,” he said.

Founder Masayoshi Son has said that SoftBank’s loan-to-value ratio, or net debt divided by the share value of its holdings, should normally be 25% or less. S&P Global Ratings said in March that it expects SoftBank to run the index around 30%, adjusting the pace of investment in its fund business.

Investors have recently been watching for signs that SoftBank could sell some of its close to 25% stake in Alibaba. SoftBank posted a profit equivalent to $558 million in the last three months of 2021 after using what Son called a “small portion” of Alibaba’s shares to settle contracts.

“SoftBank might need to sell more than [its] Alibaba shares because they have a lot more financing needs going forward,” said Atul Goyal, an analyst covering technology, gaming and telecoms at Jefferies. A SoftBank spokeswoman declined to comment on the listed shares.

In its quest to fund new investment, Mr. Son’s company has already raised tens of billions of dollars backed by shares in the Chinese e-commerce giant and some of SoftBank’s other listed holdings in recent years, without reaching to a full sale.

This so-called asset-backed financing, which uses a combination of derivatives and loans, shows SoftBank’s openness to bold and sometimes complex financing deals. The figures do not affect the loan-to-value ratio, which reflects conventional debt.

From April to December 2021, SoftBank said it had raised a net $6.9 billion of asset-backed financing using Alibaba shares. It has also raised funds against his holdings in

T-Mobile USA INC.,

Deutsche Telecom AG

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

Overall, Alibaba’s equity-based asset-backed financing was valued at the equivalent of about $25.8 billion at the end of 2021, SoftBank said last month, equivalent to about 35% of its Alibaba stake.

Financing is obtained in part through margin loans and in part through prepaid forward contracts. The contracts are agreements in which the banks or intermediaries pay SoftBank in advance, and agree to settle the obligation later, either in shares, cash or a combination.

The contracts could be a way for SoftBank to reduce its stake in Alibaba. However, they do not commit SoftBank to selling shares in the future, and how it decides to liquidate could depend on things like its liquidity and Alibaba’s share price.

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Some offers set minimum prices for the shares used to settle the contract, while others set both a minimum and a maximum. A recent SoftBank filing said the use of forward contracts “hedges against a drop in the stock price below the price floor.”

Alibaba’s contribution to SoftBank’s overall Net Asset Value has dropped sharply, to 24% in December 2021, down from a peak of 60% in September 2020. Figures exclude Alibaba shares that have been used to raise funds.

Alibaba headquarters in Hangzhou, China.


Photo:

Qilai Shen/Bloomberg News

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

A recent intervention by Chinese policymakers to restore market confidence and a move by Alibaba to increase your buyback program at a record $25 billion, have helped the Chinese company’s shares recoup most of their year-to-date losses.

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

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