SoftBank’s OpenAI bet is raising liquidity crunch concerns

SoftBank’s rise to become Japan’s most valuable company has put a spotlight on the conglomerate and raised the question of whether it is taking on too much risk through its highly leveraged bet on artificial intelligence.

Shares of the Japanese tech investment giant led by founder Masayoshi Son have risen nearly 70% this year on investor enthusiasm for artificial intelligence, fueled by the rising valuation of chip designer Arm Holdings and expectations that OpenAI could see a blockbuster IPO this year.

That rally helped SoftBank dethrone Toyota in the market cap rankings earlier this week, cementing a dramatic turnaround for a company reeling from losses tied to its failed WeWork bet just a few years ago. SoftBank’s cumulative investment loss in WeWork exceeded $14 billion.

Analysts interviewed by CNBC warned that the market’s renewed optimism about SoftBank also masks rising balance sheet risks.

“Softbank has become a highly leveraged bet on AI, which carries significant upside and risks,” said Gil Luria, head of technology research at Davidson equity capital markets.

The company participated in OpenAI’s funding round last year at a $300 billion valuation and has continued to deepen its participation. secured $40 billion bridge loan in March To help fund additional investments in OpenAI and general corporate purposes.

SoftBank has interest-bearing debt of approximately 16.3 trillion yen (about $104 billion) by the end of 2025. financial statement.

S&P Global in March I guess that OpenAI will make up around 30% of SoftBank’s investment portfolio, on par with Arm Holdings, following the group’s additional $30 billion investment in the ChatGPT maker.

S&P Global Ratings SoftBank’s credit outlook changed to negative It was said in March that the company’s asset liquidity and portfolio quality, as well as its financial capacity, “will likely deteriorate due to its additional large investment in OpenAI.”

For some investors, the concern isn’t just the amount of debt, but that SoftBank’s future is too tied to a single company.

Richard Windsor, founder of stock research company Radio Free Mobile, said, “Softbank’s risk profile is large and growing. If OpenAI fails to achieve this, SoftBank could easily experience a liquidity shortage.”

The growing reliance on OpenAI has also raised questions about what happens if interest in AI valuations wanes.

“If OpenAI does not successfully IPO at the current valuation or at a better valuation, that could put some pressure on Softbank given the size of the risk,” Luria said. OpenAI’s valuation reached $852 billion after a record $122 billion funding round in March.

Jay R. Ritter, professor emeritus SoftBank’s leverage amplifies both the positive and negative aspects of the trade, said Warrington Business School. “Buying Softbank is partly a leveraged bet on OpenAI,” he said. “If OpenAI performs well, leverage will be great. But if OpenAI and other investments perform poorly, leverage will hurt Softbank.”

He also noted other weaknesses in SoftBank’s expanding portfolio, including underperforming holdings like Coupang and Didi, while noting that the company’s heavy losses from WeWork illustrate the dangers of concentrated bets.

SoftBank, through its Vision Fund, poured billions of dollars into WeWork, once among the world’s most valuable startups, but the office-sharing startup’s valuation collapsed amid concerns about its business model and corporate governance. The Covid pandemic has worsened their financial woes.

The company, once valued at $47 billion, filed for bankruptcy protection in the US in 2023, forcing SoftBank to absorb huge losses.

Some investors argue that the risks are manageable. Comgest portfolio manager Richard Kaye said SoftBank’s assets still comfortably cover its debt obligations and the company’s loan-to-value ratio remains below 25%.

“Softbank’s debt is sustainable because its loan-to-value ratio, its total borrowings and its immediately available equity capital are below 25%,” Kaye said, adding that lenders remain willing to provide financing against SoftBank’s equity assets.

OpenAI said the disappointment would not create solvency issues. “The OpenAI disappointment could manifest as a one-time cut, but it need not create a liquidity crunch as Softbank has sufficient equity capital to offset such losses.”

Son defended SoftBank’s aggressive push into AI in a recent interview with CNBC, calling the tech revolution “50 times bigger” than the dot-com boom and arguing that any future correction in AI-related stocks would represent a buying opportunity rather than a structural threat.

SoftBank did not immediately respond to CNBC’s request for comment.