SoftBank's High-Yield Hybrid Bond: A Strategic Financing Play for AI or a Growing Risk?

SoftBank’s recent 35-year high-yield hybrid bond issuance—priced at a record 4.556% coupon for a Japanese corporate bond this year—has reignited debates about its aggressive debt strategy. The bond, which qualifies for 50% equity treatment from rating agencies, is marketed as a tool to fund AI-driven growth initiatives, including the $500 billion Stargate Project and a $30 billion stake in OpenAI [1]. However, with a net debt-to-EBITDA ratio exceeding 13x and interest coverage of just 1.6 times [2], the question remains: Is this a calculated bet on the future of AI, or a dangerous escalation of leverage?

Strategic Rationale: Funding the AI Revolution

SoftBank’s hybrid bond is structured to align with its long-term vision. The 35-year term and optional interest deferral feature provide flexibility to manage cash flow during periods of high reinvestment, while the step-up coupon (increasing by 25 basis points at 5Y, 20Y, and 25Y) reflects confidence in future revenue growth [1]. The proceeds will also redeem older hybrid notes and fund capital expenditures, reducing near-term refinancing risks [1].

The 50% equity treatment from agencies like S&P Japan is critical. By classifying half the bond as equity, SoftBank avoids diluting shareholder stakes while bolstering its capital base—a tactic used previously to support Vision Fund 2’s AI bets [3]. This structure mirrors the company’s broader hybrid capital strategy, which includes bond-type class shares and perpetual debt, all aimed at funding high-risk, high-reward projects [1].

Financial Health: A Double-Edged Sword

SoftBank’s leverage metrics tell a mixed story. While its EBIT cover of 10.9 times and net debt-to-EBITDA of 2.4 suggest short-term liquidity is manageable [1], the group’s total liabilities of ¥31 trillion (as of March 2025) and cash reserves of only ¥3.71 trillion highlight structural fragility [2]. The hybrid bond adds to a debt pile that now exceeds ¥14 trillion, with interest costs alone posing a significant drag if AI investments underperform [2].

The company’s AI bets, however, are not without precedent. Arm Holdings, acquired for $32 billion in 2016, is now valued at over $145 billion, proving SoftBank’s ability to transform long-term tech plays into value drivers [2]. Recent successes, such as exits from DoorDash and Wiz, and a $9.7 billion OpenAI investment, suggest its AI strategy is maturing [3]. Yet the $8 billion annual burn rate of OpenAI and regulatory scrutiny of AI projects remain unresolved risks [1].

Risks: Leverage vs. Execution

The hybrid bond’s risks stem from two vectors: leverage and execution uncertainty. At 13x debt-to-EBITDA, SoftBank’s leverage is unsustainable for most firms, even with AI’s growth potential [2]. A misstep in Stargate or OpenAI could trigger a liquidity crisis, especially if interest rates rise or AI adoption slows.

Execution risks are equally acute. While Arm and Ampere Computing (acquired for $6.5 billion) are strategic wins [2], past Vision Fund losses—such as the $1.8 billion write-down on WeWork—demonstrate the volatility of tech investing [2]. OpenAI’s regulatory challenges and the unproven commercial viability of artificial superintelligence add layers of uncertainty [1].

Conclusion: A Calculated Gamble

SoftBank’s hybrid bond is a high-stakes chess move. It reflects a belief that AI will generate returns sufficient to justify today’s leverage, much like Arm did a decade ago. Yet the bond’s 4.556% coupon—Japan’s highest this year—signals investor skepticism about the company’s ability to service such debt [2]. For investors, the key is to weigh SoftBank’s historical resilience against the unprecedented scale of its AI ambitions. If the Stargate Project and OpenAI deliver, the bond could be a masterstroke. If not, it may become a cautionary tale of overreach in the AI era.

Source:
[1] SoftBank’s Hybrid Capital Innovation and Leverage Strategy in the AI Era [https://www.ainvest.com/news/softbank-hybrid-capital-innovation-leverage-strategy-ai-era-balancing-risk-reward-long-term-creation-2508]
[2] SoftBank Group (TSE:9984) Risk Profile [https://simplywall.st/stocks/jp/telecom/tse-9984/softbank-group-shares/news/is-softbank-group-tse9984-a-risky-investment]
[3] SoftBank Vision Fund 2’s AI Investments [https://group.softbank/en/ir/financials/annual_reports/2025/message/svf]