[AI Bubble] “Even Taking on Credit Risk”: SoftBank Goes All-In on AI Investment, With OpenAI’s IPO Likely to Determine the Outcome

SoftBank Group accelerates AI-related investment by issuing junk bonds
Firmly dismisses market concerns, saying “Missing investment opportunities would be the greater loss”
As OpenAI moves toward a market debut, will SoftBank’s “bet” pay off?

Japan’s SoftBank Group (SBG) is pressing ahead with aggressive investment in the artificial intelligence (AI) sector. After pouring tens of billions of dollars into OpenAI last year, it has since recommitted to another large-scale investment and is stepping up efforts to secure the necessary funding. With repeated borrowing to finance those investments significantly amplifying SoftBank’s credit risk, market observers are increasingly concluding that OpenAI’s eventual initial public offering (IPO) will determine the success or failure of SoftBank’s investment campaign.

SoftBank’s determination to invest in AI

On April 15 (local time), Bloomberg reported that SoftBank had issued $3.6 billion worth of speculative-grade bonds, or junk bonds. In the process, SoftBank sold $1.5 billion in dollar-denominated bonds and about $2.0 billion in euro-denominated bonds. The coupon on the 10-year dollar bond was set at 8.5%. That marks the highest rate ever on a dollar bond issued by SoftBank and stands well above the average yield on dollar-denominated junk bonds, which was 6.81% as of April 14.

Behind the surge in bond yields lies SoftBank’s credit risk. Premiums on SoftBank’s credit default swaps (CDS) have widened sharply since November last year, climbing to among the highest levels for Japanese companies. In response, Standard & Poor’s (S&P), one of the world’s three major credit rating agencies, revised SoftBank’s credit outlook to “negative” last month. Mark Chapman, an analyst at credit research firm CreditSights, also said in a report that “SoftBank’s balance sheet has been stretched to its limit,” adding that “while the value of its holdings remains robust, its debt burden is becoming excessively onerous.”

SoftBank’s financial condition has deteriorated because it has poured vast sums into AI companies such as OpenAI. Previously, in February last year, SoftBank agreed to invest $40 billion in OpenAI, valuing the company at $260 billion. It then injected $7.5 billion directly into OpenAI in April last year and, together with co-investors, raised an additional $11 billion. By the end of last year, it had committed another $22.5 billion to OpenAI, bringing its total investment to $41 billion. After completing that commitment, SoftBank once again pledged to invest $30 billion in OpenAI through Vision Fund 2.

Repeated external fundraising

The problem is that this aggressive investment drive has been accompanied by a steady stream of large-scale bond issuance. In May last year, SoftBank issued about $4.1 billion in retail corporate bonds, and in July it sold a total of $4.2 billion in dollar- and euro-denominated corporate bonds in global markets. In October of the same year, it issued about $2.9 billion in foreign-currency hybrid bonds, and in December it raised funds again through roughly $3.4 billion in corporate bonds.

Last month, it also executed a $40 billion bridge loan. According to Reuters, the fundraising was intended to secure capital for OpenAI investment and operations, with a number of major banks participating, including JPMorgan Chase, Goldman Sachs, and Japan’s three megabanks—Mizuho, Sumitomo Mitsui, and Mitsubishi UFJ. The loan was unsecured and set to mature in March 2027. Despite being unsecured, its maturity was only 12 months. Because unsecured lending carries higher risk, it is customary to set a longer maturity.

SoftBank has long maintained confidence that there is no problem with this sort of bold investment posture. In an interview with Nikkei late last year, SoftBank Group Chief Financial Officer Yoshimitsu Goto said of the large-scale corporate bond issuance that it was “by no means financially unsound.” His argument was that even if a financial crisis on the scale of the Lehman Brothers collapse were to recur and halve the value of its stock holdings, the company would still remain in a safe position. “Investment to grow our most important assets, such as OpenAI and Arm, is absolutely necessary,” he said, stressing that “missing good investment opportunities would be the greater loss.” He added that “even if debt temporarily rises and LTV [loan-to-value] exceeds 25%, that can be tolerated.” An LTV below 25% is SoftBank’s target under normal conditions, and as of the end of December last year, its LTV stood at 20.6%.

OpenAI’s IPO plans come into focus

The key variable likely to determine whether SoftBank’s investment strategy succeeds is OpenAI’s IPO. If OpenAI enters the stock market, it would be able to use what could be the largest liquidity event in history to retire a large portion of its short-term debt, including the bridge loan executed last month. According to Reuters and other foreign media reports last month, OpenAI is currently restructuring its internal finances and investment framework with the aim of going public within the year. Its target valuation is as high as $1 trillion, placing it among the world’s largest technology companies.

Ahead of a listing, OpenAI is also accelerating efforts to improve profitability. A representative example is its hiring of David Dugan, formerly Meta’s vice president in charge of advertising, as head of advertising solutions. Dugan is a veteran of the advertising industry who spent more than a decade at Meta and built close networks with major advertisers and agencies. OpenAI’s plan is to use Dugan as the spearhead in developing its advertising business into a core revenue engine. Its B2B business, led by the AI coding tool “Codex,” is also being cited as a central pillar of the company’s overhaul. According to the Financial Times, Fidji Simo, head of OpenAI’s applications division, told employees last month to “wind down peripheral work and improve Codex,” instructing them to “focus on winning enterprise customers and turning ChatGPT into a productivity tool.”

More recently, OpenAI has also laid out more concrete thinking related to a public listing. Its intention to go public, long treated as a near certainty, has now been officially confirmed. In an interview with CNBC on April 8, OpenAI Chief Financial Officer Sarah Friar said, “We have seen very strong demand from retail investors,” adding, “When we go public, we will absolutely allocate a portion of shares to them.” While she did not comment on the timing of the IPO, she stressed that “it is healthy for a company of OpenAI’s scale to look, feel, and act like a public company,” and added that “if it goes public, it will be able to secure vast sums for infrastructure through instruments such as convertible bonds and investment-grade debt.”