SoftBank 5-Year CDS Surges to 432 Basis Points, a Four-Year High, as Masayoshi Son's AI Bet Draws Bond Market Warning
SoftBank Group's measure of credit risk is rising quickly. On October 20, the cost of five-year credit default swaps (CDS) on SoftBank reached 432 basis points, its highest level since November 2022. CDS are a type of insurance against a borrower failing to repay its debt. When CDS prices rise, investors are paying more to protect themselves against that risk. Among major Japanese companies, SoftBank now has the highest CDS price, more than 130 basis points above Nissan Motor, which ranks second.
This rise comes as SoftBank continues to increase its investment in artificial intelligence (AI). Earlier this month, SoftBank completed a new $10 billion investment in OpenAI. This brought its total investment in the company to $64.6 billion (about 431.5 billion yuan) and gave it an ownership stake of roughly 13%. In February, SoftBank announced another $30 billion investment in OpenAI, to be paid in three parts in April, July and October. To fund this investment, SoftBank signed an agreement with banks in March for a temporary $40 billion loan. It borrowed $30 billion in stages, paid back the remaining $25.9 billion of borrowing early on September 15, and canceled the unused $10 billion loan facility at the end of the month.
Paying back the temporary loan did not remove the pressure to raise money. On September 24, SoftBank issued about $11.1 billion in bonds denominated in U.S. dollars and euros. These included a $4.5 billion U.S. dollar bond due in 2034 with an interest rate of 9.75%, the highest interest rate SoftBank has ever paid on a bond issue. By comparison, Alphabet, Google's parent company, issued a bond due in 2033 in August with an interest rate of only 5.2%.
Alex Clavel, head of the company that manages SoftBank's Vision Fund, explained in an October 14 interview why SoftBank would rather pay high interest than sell assets: "We borrow money largely because we don't want to sell assets that we believe will continue to appreciate."
SoftBank's management believes that the potential gains from its OpenAI investment will be enough to cover borrowing costs of nearly 10%. But bond investors clearly see things differently. James Athey, a manager of bond investments at British asset manager Marlborough, said SoftBank's investment strategy is too aggressive and puts too much money into one bet. He said he would not rank SoftBank among his top choices even when looking at high-yield bonds, which generally pay higher interest because they carry greater risk.
David Gibson, an analyst at MST Financial, compared SoftBank to a roulette game. He said that in the past, SoftBank bet on many different numbers on the table, but now it is betting only on red or black. In other words, it could either lose everything or win everything. Another analyst, Amir Anvarzadeh, said Masayoshi Son's current bet is bigger than any of his previous ones. He directly advised investors to bet against SoftBank shares by selling them short.
SoftBank's share price has fallen by more than half from its June peak. And worries in the market are not limited to SoftBank alone.
Pressure Across the AI Debt Chain
According to Morgan Stanley, the average weekly trading volume of CDS for companies including Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia was below $2 billion in July. By September, it had risen above $9 billion. At the same time, companies linked to AI have raised about $466 billion this year through bond sales, private lending and other forms of financing. That compares with just $101 billion raised in the previous year.
Some stock funds and funds that invest across several types of assets have started using CDS to protect themselves against falling AI share prices. Not everyone buying these contracts is trying to protect bonds they already own.
The pressure is even greater for some individual companies. CoreWeave, a cloud computing company backed by Nvidia, has borrowed heavily to buy graphics processing units (GPUs) and build data centers. It then rents computing power to customers such as Microsoft. As concerns about AI-related debt have grown, CoreWeave's shares have fallen nearly 40% in October. Prices for its five-year CDS have risen above 1,100 basis points, and some of its bonds now offer yields of around 16%.
That same day, The Wall Street Journal disclosed a draft prospectus for Anthropic's planned initial public offering (IPO). The document showed that the company reported an $80.7 billion net loss on paper in the first half of this year. Of that amount, $72 billion came from accounting charges caused by changes in the value of financing tools such as convertible notes, which can be changed into shares. A more notable figure was its spending on computing. Anthropic spent nearly $9 billion on computing power and infrastructure in the first half of the year, already more than the $7.3 billion it spent during all of last year. Including deals still being negotiated, its computing spending over the next several years could reach $750 billion, with more than $600 billion covered by signed agreements.
Mark Habib, head of digital infrastructure at S&P Global, warned in an October 19 interview that large technology companies may have more AI-related debt and financial obligations than the public knows. Some data-center projects raise money through complicated financing arrangements, while major technology companies provide guarantees for the projects or the companies behind them. This means some risks may not appear fully in public financial reports. However, S&P has not called for broad credit-rating downgrades of major technology companies because of these concerns.
OpenAI's Valuation Falls by $150 Billion
The company at the center of SoftBank's biggest investment is also changing its plans. According to media reports, OpenAI plans to raise about $30 billion at a valuation of $1.25 trillion before the new money is added. This is $150 billion, or about 11%, below the $1.4 trillion valuation discussed in earlier talks. Investors from the United Arab Emirates will lead the funding round together with Coatue Management. OpenAI hopes to have signed commitments by the end of next week, with the investment process expected to close around October 30.
OpenAI had just completed a $122 billion funding round in March, at a valuation of about $852 billion including the new money. Even at its latest proposed valuation before new funding, the company's value has increased by nearly $400 billion in a little more than six months. People familiar with the matter said OpenAI sees this round as an "opportunistic" way to raise money to bridge the gap before a possible IPO. Chief Financial Officer Sarah Friar has told employees that the company could go public in 2027.
The main figure OpenAI is showing investors is its fast-growing revenue. After the launch of GPT-6 Astra, its annualized revenue, which estimates a full year's revenue from its current pace, has reached about $50 billion. The company expects that figure to rise to $70 billion by the end of the year. OpenAI also says usage has increased since it lowered prices for some cheaper models, and that it could cut prices further.
SoftBank was previously reported to be discussing an investment in this funding round, but it has not revealed how much it might invest. If it invests again, it will need to find more money.
A Gap Between Asset Values and the Ability to Pay Debt
Based on the figures SoftBank has made public, the company is not yet in an extremely difficult financial position. At the end of June this year, it held investment assets worth about 83.11 trillion yen. Its group-level net debt was 10.81 trillion yen, and its loan-to-value (LTV) ratio was 13%. This ratio compares debt with the value of investment assets. SoftBank's management aims to keep the ratio below 25% under normal market conditions and within 35% in extreme conditions.
However, these figures are from the end of June. Since then, SoftBank has made major investments and acquisitions. At the end of September, it completed its roughly $3.1 billion purchase of DigitalBridge, a company that manages investments in data centers. It had earlier agreed to buy ABB's robotics business for about $5.375 billion. More recently, it has held early-stage talks to acquire Allied Universal, a major U.S. security company. The potential value of the shares in that deal could reach about $18 billion, while the total deal value, including debt, could reach $30 billion.
Sharon Chen, a credit analyst at Bloomberg Intelligence, expects SoftBank's net cash outflow to reach at least $6 billion in the financial year ending March 31, 2027. If SoftBank continues to increase its AI investments or completes the Allied Universal acquisition, it will need to raise more money. Its LTV ratio could gradually move closer to the 25% limit set by management.
SoftBank borrows money to invest in OpenAI. OpenAI and AI model companies such as Anthropic commit to buying computing power years in advance. Cloud computing and data-center companies then borrow money to buy chips and build the facilities needed to provide that computing power. These debts belong to different companies, but the returns on their investments all depend, to varying degrees, on continued growth in the AI market. If revenue is lower than expected, AI model companies may struggle to pay for the huge computing contracts they have signed and may have to reduce their purchases. Data-center operators could then find it harder to get financing, while investment firms could face both falling asset values and rising borrowing costs.
For SoftBank, the real test may not be whether AI eventually creates wealth. It may be whether changes in the value of its assets happen at a pace that allows the company to keep paying interest on its debts when payments are due. With CDS prices back at levels last seen during the technology market selloff four years ago, the bond market is already reflecting concerns about this gap.