Rakuten’s costly junk bonds signal challenges

CEO of Rakuten Hiroshi Mikitani arrives for a State Dinner in honor of Japanese Prime Minister Fumio Kishida, at the Booksellers Room of the White House in Washington, DC, on April 10, 2024. (Photo by Drew ANGERER / AFP)

Tokyo: 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 US dollars.

Doing so is proving expensive.

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 US$3.8bil 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 US 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 the group is paying the price for years of expansion fuelled 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 US$4.4bil of notes issued in yen and US 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 yesterday. 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 monetisation 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 US Federal Reserve cuts interest rates. Last week’s US$2bil 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 yen of those notes outstanding, according to data compiled by Bloomberg.

Rakuten has also filed a shelf registration to sell as much as 100 billion yen 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 US$3bil since March 2021, according to the Bloomberg Billionaires list. — Bloomberg

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