SoftBank – Fire sale?

SoftBank is likely to have to sell more assets. 

• SoftBank is in an increasingly tight spot as many of its portfolio companies are in trouble and need cash injections right at the exact time when SoftBank needs to conserve cash the most.

WeWork – Any more work?

• WeWork is in real trouble and SoftBank’s withdrawal from the share purchase worsens the situation materially.
• During Q4 19 it burned through $1.4bn in cash and the outlook for 2020 is that its burn rate is going to increase further.
• This is because WeWork has made long-term commitments to the owners of the buildings that it has rented and then sub-lets to its clients.
• The problem is that the COVID-19 pandemic means that no-one wants to share anything at the moment meaning that the sharing economy is in meltdown.
• Hence, the demand side of its business is evaporating while it is still on the hook for the rent it has to pay to the building owners.
• It is trying to negotiate a 30% cut in the rent it pays but the only negotiating tactic will be: “if you don’t give us a cut we will go bust and you will get nothing”.
• The problem is that the landlords also have bills and mortgages to pay and they are unlikely to be in much of a position to help.
• SoftBank’s withdrawal of the share purchase commitment it made is a very serious blow for WeWork as the deal also contained an extra $1.1bn in debt financing for WeWork which it desperately needs.
• The result of the withdrawal will be a slew of lawsuits against SoftBank but by the time they come to trial, this dire situation will have resolved itself one way or another.
• Hence, I think that lawsuits hold little fear for SoftBank which is why pulling out, even if it loses the suits, is the best option.
• For WeWork, the situation is dire and without SoftBank, I am pretty certain that it would already be insolvent.
• However, I think SoftBank will ensure that it does not go under but as it does that, any remaining shareholders are likely to get wiped out.

Banks & Kabbage – cash crunch.

• While the markets may be indicating that the flight to cash is over, there are signs that the financial sector is still really struggling.
• Everywhere across the world banks are being vilified for cutting their best lending deals, denying clients previously agreed lines of credit and increasing the costs of borrowing.
• This is counter-intuitive given that interest rates have been slashed to zero or near zero in many places.
• The reason for this is not profiteering but the supply of cash.
• Banks make money by borrowing at one rate and lending at another and when demand for lending increases, they need to go to the wholesale market for extra money as deposits won’t suddenly grow.
• The problem is that they are having difficulty securing cash in the wholesale market meaning that they don’t have enough liquidity to lend out to their clients.
• This is exactly what is troubling another one of SoftBank’s portfolio companies, the fintech lender Kabbage.
• The wires are awash with complaints from customers who have suddenly had their credit lines cut, often with no warning at all.
• If Kabbage is unable to secure cash for lending from the wholesale market, its owners will need to put more money in leading to yet another cash call on SoftBank that it can ill afford.

Take-Home Message.

• WeWork and Kabbage are likely to be typical examples of many of SoftBank’s portfolio companies and I see big cash calls coming.
• SoftBank has already committed to raising $41bn by selling $14bn in Alibaba as well as a range of its other assets.
• Approximately half will be used to buy back shares and the rest put towards reducing debt.
• However, SoftBank is also likely to have to support its portfolio and so I see the possibility that it will be forced to sell more assets and give more value away.
• I think that at some point, there will be a great opportunity in SoftBank, but as more news of the difficulties that many of its portfolio companies are suffering filters out, I think that sentiment will sour further.
• I would like to see better visibility on this before thinking of making a value-based investment in SoftBank.