S&P Downgrades SoftBank's Outlook to "Negative": $30 Billion Additional Bet on OpenAI May Threaten Liquidity

Standard & Poor’s has downgraded SoftBank Group’s outlook from stable to negative, citing plans to invest an additional $30 billion in OpenAI, which could impair the company’s liquidity and the credit quality of its assets. This change in outlook follows SoftBank’s decision last month to increase investments in the ChatGPT developer. Previously, SoftBank had invested over $30 billion in OpenAI and backed other AI companies. S&P maintained the company’s long-term issuer credit rating at BB+ and stated that SoftBank could limit negative financial impacts by selling assets.

In a statement on Tuesday, the rating agency said, “The company’s investments in AI, including OpenAI, mainly involve startups and private companies facing significant AI innovation risks and intense competition. We consider OpenAI to be one of its riskiest investments in terms of credit quality.”

A SoftBank representative appreciated S&P’s decision to keep its long-term rating unchanged. The spokesperson said via email, “S&P has fully considered our strong track record of managing our financial base under pressure.” Last year, SoftBank sold assets including shares in T-Mobile US (TMUS.US) and Nvidia (NVDA.US) to fund founder Masayoshi Son’s investments in AI.

SoftBank plans to make three additional investments of $10 billion each year in OpenAI, increasing its stake in the U.S. startup from about 11% in December last year to 13%. S&P indicated that OpenAI’s share of SoftBank’s portfolio could reach a level comparable to that of Arm Holdings (ARM.US), a UK chip design company, and noted that its non-listed holdings would rise from approximately 42% in December to over 50%.

S&P stated, “As OpenAI’s proportion within SoftBank’s portfolio continues to grow, its liquidity will further deteriorate.” The company has listed assets for sale to ease financial pressure, but the timing of these sales remains uncertain. S&P also warned, “If SoftBank fails to take swift measures, such as selling holdings, its rating could face greater downward pressure.”

Analysts note that S&P’s negative outlook, rather than a credit watch listing, gives SoftBank time to reduce its loan-to-value ratio below 35% through asset sales, thereby defending its BB+ rating. Additionally, an IPO for OpenAI could improve the liquidity of its investment portfolio. However, geopolitical risks and the potential AI bubble could pressure valuations of tech companies, keep the loan-to-value ratio low, and further delay OpenAI’s already uncertain IPO timeline, posing ongoing challenges.

S&P indicated that additional investments in OpenAI could also harm SoftBank’s loan-to-value ratio. For years, SoftBank has used this ratio to demonstrate its debt repayment capacity. S&P said that if SoftBank improves its liquidity through IPOs, including that of OpenAI, while maintaining portfolio quality and increasing its loan-to-value ratio via asset sales, it would consider upgrading its outlook.