Technology investor SoftBank Group (9984.T) reports first-quarter earnings on Thursday, with analysts focused on how it will fund its ongoing investment in OpenAI and the impact of rising leverage on its balance sheet.
SoftBank has become one of the biggest backers of OpenAI and its ability to keep funding its ambitions in artificial intelligence has become a key test for the broader AI investment boom. The finances of AI firms are facing heightened investor scrutiny as financing needs grow and the use of debt increases.
SoftBank is expected to post net profit of 148.4 billion yen ($941.2 million) over the April-June quarter, according to the average of four analysts polled by LSEG.
BALANCING AI AMBITIONS AND DEBT
Under founder Masayoshi Son's push to make the Japanese conglomerate a dominant investor in AI, SoftBank has committed more than $60 billion to OpenAI and related AI infrastructure projects. He recently dismissed talk of an AI bubble as "blasphemy" and 15 out of 20 sell-side analysts polled by LSEG had a buy or strong buy rating on the stock in August.
Investors, however, are questioning how SoftBank will fund its commitments, with $30 billion of obligations due in the second half of 2026 and growing reliance on loans secured against its holdings.
SoftBank has a $40 billion bridging loan, but this matures in March 2027. It has arranged a $20 billion margin loan on its stake in chip designer Arm (O9Ty.F), but its attempt to use its OpenAI holding as collateral for another loan has been held up as lenders have become more cautious about extending credit backed by private companies.
"We think Arm has a solid credit profile but OpenAI is very weak. It's a startup with significant AI innovation risk and lots of competition," S&P Global Ratings' Makiko Yoshimura said.
S&P raised SoftBank's credit outlook to stable from negative in July due to the rise in Arm's share price, which reduced the ratio of its debt to asset value.
SoftBank has maintained a loan-to-value ratio below its self-imposed limit of 25% in normal times even as its OpenAI investment has grown. It also maintains two years' worth of bond redemptions in cash and cash equivalents.
"As of March I can say our loan to value and cash position have been improving," Chief Financial Officer Yoshimitsu Goto said at last quarter's earnings briefing.
Unlike SoftBank, S&P's criteria for calculating the loan-to-value ratio include margin loans backed by investee company shares, bringing its estimated ratio at the end of March to 33%, compared with SoftBank's internal figure of 17%.
But the ratings agency expects this figure to have dropped to between 20% and 25% in June.
Nevertheless, some analysts highlight SoftBank's vulnerability to further reratings of AI companies.
"If Arm's valuation drops, the value of the loan against it does not," said Amir Anvarzadeh of Asymmetric Advisors. "A significant drop in the price of its assets could mean a liquidity squeeze," Anvarzadeh said.
Fitch Ratings has identified an AI market correction as a major credit risk, citing rising valuations, the scale of AI capital expenditure and the uncertainty of AI company returns.
"SoftBank, Arm and memory stocks are likely to continue to come under pressure until end users and corporates show that this is the beginning of a productivity surge," MST Financial analyst David Gibson wrote in a note.
While the latest AI models are becoming increasingly powerful, competition from much cheaper and similarly effective Chinese AI models may spark a price war, hitting the margins of frontier developers such as OpenAI as well as demand for the chips powering them, analysts say.
The key question for SoftBank is whether OpenAI is able to secure funding from other parties - either through a public listing or another private round - at a higher valuation, analysts say.
OpenAI is reported to be seeking an IPO valuation of $1 trillion, a jump from its $852 billion valuation, although a New York Times report suggested this may be delayed to next year.
Others are more sceptical.
"The true value of OpenAI is perhaps no more than $300 billion, judging by the smaller IPO plans of the Chinese players," Anvarzadeh said.
($1 = 157.6800 yen)
