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Updated: New York, Oct 13 01:46London, Oct 13 06:46Tokyo, Oct 13 14:46

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9984:JP
Softbank Corp
Softbank Pledges Record Collateral for Vodafone Deal



Oct. 13 (Bloomberg) -- Softbank Corp. founder Masayoshi Son, Japan's richest man, pledged a record amount of collateral to refinance $10.7 billion of debt used in the acquisition of Vodafone K.K., the country's third-largest mobile phone company.

Softbank, Japan's second-biggest Internet access provider, offered Vodafone K.K.'s assets, income and shares as security for $12 billion of bonds and loans it plans to sell next month. The deal will pay off short-term loans from the April purchase and exceeds the 3.4 billion pounds ($6.3 billion) of secured bonds sold in 2002 by Cambridge, U.K.-based Anglian Water Plc, the biggest similar sale, according to Standard & Poor's.

Son, 49, agreed to provide the security to get investment- grade ratings on the Tokyo-based company's debt and cut annual interest costs by at least 1 percentage point, data compiled by Bloomberg shows. He also promised that Vodafone K.K. will meet revenue targets and limit expansion outside the mobile-phone industry, stricter controls than are normal under creditor agreements, said S&P analyst Masahiro Shidachi in Tokyo.

``This was the only viable way Softbank could do it,'' said Lye Thiam Wooi, who helps manage $55 billion at Prudential Asset Management Asia Ltd. in Singapore, and may buy some of the debt. ``If Softbank came to the market raising $12 billion of straight corporate bonds with their current credit ratings, the cost of debt would put them in financial stress.''

Softbank bought Newbury, England-based Vodafone Group Plc's Japanese business for $15 billion, giving it 15 million mobile- phone users in the world's second-largest economy.

Son, whose net worth is $7 billion, according to Forbes Asia, agreed to provide more security because Softbank needs the money to repay 1.28 trillion yen ($10.7 billion) in short-term financing. Vodafone K.K. originally paid interest on the loan of 250 basis points more than the Tokyo interbank offered rate, a lending benchmark. That premium rose to 300 basis points when Softbank was unable to arrange new financing by the end of September. It will increase to 350 basis points unless the new debt is in place by the end of the year.

Three-month Tibor is about 0.44 percent. Each 50 basis-point increase costs Vodafone K.K. 6.4 billion yen in annual interest payments. A basis point is 0.01 percentage point.

Creditors have ``ultimate control of the company'' with this type of debt, said Yukio Egawa, head of Japan securitization research at Deutsche Bank AG in Tokyo. ``If the company fails or can't generate sufficient cash flow to meet the debt obligation, investors can step in to change the management, the way the company conducts its business, or sell the company.''

Funding Costs

The biggest part of the new financing is a 600 billion-yen loan that will pay interest at 100 to 150 basis points more than Tibor, said four bankers arranging the deal, who declined to be identified because the information isn't publicly disclosed. It also will include a 350 billion-yen loan with an interest margin of 150 to 250 basis points, the bankers said.

Most of Vodafone K.K.'s bonds and loans will be ranked A3 by Moody's Investors Service and A by S&P. The existing loan doesn't have credit ratings, and Softbank's bonds are ranked Ba2 by Moody's and BB- by S&P.

Debt rated below Baa3 by Moody's and BBB- by S&P is considered non-investment grade, or junk.

``We chose this type of asset-backed debt because it enables the securities to be rated higher than the ratings given to Softbank,'' said Jin Nakamura, a Softbank spokesman. ``As a result we can reduce the interest payments.''

Nakamura declined to disclose the terms of the financing.

Bond Sale

Citigroup Inc., Deutsche Bank and Mizuho Financial Group Inc. arranged the initial loan with four more banks and are organizing the refinancing, helped by 15 more firms including WestLB AG, Calyon and Royal Bank of Scotland Group Plc.

Vodafone K.K.'s largest bond, a 200 billion-yen note due in 2016, will have a yield premium of 28 basis points over similar- maturity Japanese government debt, said bankers involved in the sale.

That compares with a spread of 156 basis points on Softbank's 50 billion yen of 3.9 percent bonds due in 2007. Rival Tokyo-based mobile phone operator KDDI Corp. has a 31 basis-point yield spread on its 25 billion yen of 1.14 percent bonds maturing in 2012.

Daiwa SB Investments Ltd. fund manager Masahiro Kami said he won't buy the new Vodafone K.K. debt because the returns are too low. ``It's better to buy Softbank's corporate debt,'' said Kami in Tokyo, who helps manage the equivalent of about $5.6 billion for Daiwa, a unit of Japan's second-largest brokerage.

Softbank's deal may be imitated by companies seeking acquisitions in Japan, said Shidachi at S&P. As many as 10 Japanese companies are considering similar deals, he said.

So far this year, the only other Japanese company to sell the securities is Ucom Corp., a unit of Tokyo-based cable radio and Internet services provider Usen Corp., which raised 20 billion yen in June.

``After the Vodafone deal, we're seeing increased interest and more advanced discussions for this type of financing,'' said Shidachi, without identifying any companies.




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