Yahoo Finance Rakuten’s Costly Junk Bonds Signal Challenge for Japanese Billionaire Mikitani
(Bloomberg) -- After five straight years of losses, billionaire Hiroshi Mikitani’s Rakuten Group Inc. is trying to bounce back from a move into mobile that cost it billions of dollars. Doing so is proving expensive.
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The Japanese conglomerate, which boosted its overseas profile in recent years with sponsorship deals that have included Stephen Curry’s Golden State Warriors and FC Barcelona, raised $3.8 billion in two separate issuances so far this year as it wrestles with a mountain of debt coming due.
To get the deals away, Rakuten had to offer some of the highest coupons of any borrower in the dollar corporate bond market this year, according to data compiled by Bloomberg. Its two junk bond deals have coupons of 11.25% and 9.75%.
This indicates that the group is paying the price for years of relentless expansion fueled by low-cost borrowings, part of a wider trend of telecommunications firms including Patrick Drahi’s Altice group that are struggling after interest rates rose sharply. In particular, the huge investment required to roll out Rakuten’s mobile network dragged gauges of its creditworthiness down to junk.
Rakuten is unlikely to be able to sell new bonds to institutional investors in Japan given its present rating, several bankers with direct knowledge of previous deals said, which complicates refinancing efforts. The firm and its subsidiaries have about $4.4 billion of notes issued in yen and dollars that mature by June 2025, Bloomberg data show.
Rakuten will consider accessing the domestic and international bond markets, a spokesperson said in an email Thursday. The company is pursuing a financial strategy considering funding capacity and market trends, the spokesperson said.
“Although liquidity is improving, Rakuten will still need more funds to fill the gap,” said Adrien Letellier, a credit analyst and portfolio manager at Bordier & Cie in Geneva, who holds some of the conglomerate’s debt. “It could come from yen hybrid bonds, further asset monetization and additional bond issuance later this year.”
Rakuten has been able to chip away at its maturity wall by taking advantage of the rally in credit as investors lock in high yields before the Federal Reserve cuts interest rates. Last week’s $2 billion bond sale gives the group, a competitor to Amazon.com Inc. in Japan, more breathing room to decide on the best route forward for managing its liabilities.
“We are working to strengthen our financial soundness,” Tokyo-based Rakuten said in a statement April 4. That involves “balance sheet management through reduction of total debt and proactive debt maturity management.”
The value of the group’s various businesses amounts to 1.87 times its senior debt, according to a recovery value chart published in March by analysts at JPMorgan Chase & Co.
Mikitani’s company plans to buy back some of its bonds due in December, according to a notice from Daiwa Securities Co. this week. There are ¥75 billion ($490 million) of those notes outstanding, according to data compiled by Bloomberg.
Rakuten has also filed a shelf registration to sell as much as ¥100 billion of bond-type shares, a relatively new form of raising funds that some issuers in Japan have been exploring.
While SoftBank Group Corp.’s Masayoshi Son is the major face of Japanese tech for international investors, domestically Mikitani has a strong profile because of the wide variety of businesses his group controls. The current stumbles have seen the founder’s own fortune shrink 64% to $3 billion since March 2021, according to the Bloomberg Billionaires list.
The vast majority of his wealth comes from Rakuten, best known in the US and UK for its streaming television, e-commerce and ‘buy now pay later’ offerings.
After selling down a chunk of its online banking unit last year to shore up finances, one possible divestment option for the firm would be a disposal of its telecommunications infrastructure business Rakuten Symphony, according to one of the biggest 25 shareholders in the group.
Rakuten will further accelerate the global expansion of its mobile network solutions, with a view to accepting capital and other opportunities, the spokesperson said on Thursday.
Retail Bonds
Other options for dealing with the borrowings include turning to mom-and-pop investors in Japan. Mikitani, a former banker who later attended Harvard Business School, named some earlier retail bonds after his Tohoku Rakuten Golden Eagles baseball team, whose roster includes former New York Yankees pitcher Masahiro Tanaka.
The company will consider actively refinancing some of those bonds, Chief Financial Officer Kenji Hirose said at an earnings presentation in February. “We believe that the refinancing risk is minimal, given the depth of the retail market in Japan and the high recognition of our company,” Hirose said at the time.
Brokerages in Japan may not be able to sell all the retail bonds in such an offering, two people familiar with the matter said.
In the emailed comment Thursday, the spokesperson said that given Rakuten’s name recognition and brand awareness, it isn’t too concerned about sales to individual investors.
Rakuten said in stock exchange statement on Thursday it’s planning to sell ¥50 billion of five-year bonds with a 6% interest rate in a private placement in overseas markets, the proceeds of which will be used to partially repurchase some yen-denominated bonds due in 2025 or later.
The company’s reliance on offshore markets “may signal weak support from domestic investors and lenders,” Sharon Chen, a credit analyst at Bloomberg Intelligence, said in a report Thursday.
Last week’s sale did come as a relief to debt investors, with credit default swaps on Rakuten’s bonds tightening the most since late February.
Another positive sign is operational improvements. Last week, the company announced it was looking at combining its banking, securities, credit card and insurance businesses into a single group. That gave a fillip to the firm’s shares, which extended this year’s gains to more than 40%, more than double the Topix index, though they remain down about 18% on five years ago.
As part of a push toward profitability in the mobile unit, Rakuten has improved its cell network coverage and plans to grow subscribers to as many as 10 million by the end of this year from six million at the end of 2023, according to an earnings presentation in February. Mikitani wrote on X this week that the service now has more than 6.5 million users.
Rakuten is “still early in the needed recovery, but the trend is positive,” Bordier’s Letellier said.
Four years after the push into mobile began, the investment contributed to the firm having “less than adequate” liquidity levels, S&P Global Ratings said in a February report. Rakuten still had less than 3% of mobile users in Japan at the end of 2023, according to government data.
While the cost of breaking into the market has been higher than expected, it could prove a boon if the firm succeeds in becoming a major player in that space, the top-25 shareholder said. The unit will give Rakuten one of the biggest proprietary data collections in Japan, which may help it sell other services to customers, he added.
Still, last week’s junk bond sale indicates that Rakuten isn’t optimistic about the profit the mobile business will generate by 2025, said Kazunori Ito, director of equity research at Morningstar Investment Adviser Singapore Pte. “The company believes it isn’t yet strong enough to earn the funds needed to repay the bonds on its own.”
--With assistance from Issei Hazama, Loukia Gyftopoulou and Ayai Tomisawa.
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