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Rating Action:

Moody's downgrades SoftBank to Ba1 from Baa3 with stable outlook

 The document has been translated in other languages

Global Credit Research - 18 Jul 2013

Tokyo, July 18, 2013 -- Moody's Japan K.K. has downgraded to Ba1 from Baa3 its issuer and senior unsecured bond ratings on SoftBank Corp.

The ratings outlook is stable.

This concludes the review initiated on 15 October 2012 after SoftBank announced its plan to acquire 70% of the shares of Sprint (formerly Sprint Nextel Corporation) (B1 corporate family rating, on review with direction uncertain).

RATINGS RATIONALE

On July 11, SoftBank closed the transaction at an amended price of US$21.6 billion (approximately JPY1.8 trillion ) for a total of 78% of the shares.

The downgrade to Ba1 reflects Moody's view that 1) the debt-financed acquisition of Sprint will significantly weaken SoftBank's financial flexibility, and 2) the possibility that SoftBank will have to extend additional finance to help Sprint execute its large capital expenditure program of US$16 billion for 2013 and 2014.

The rating action also incorporates Moody's concerns over whether Sprint can generate positive free cash flow by the end of FYE12/2015. Sprint has large valuable spectrum assets and its operating performance is improving, but free cash flow remained negative in the latest quarter ended March 2013 due to its large capital expenditures.

At the same time, Moody's recognizes 1) SoftBank's strong domestic telecoms operation, backed by its efforts to improve connectivity and other measures to retain existing customers and attract new ones and 2) its position as Japan's No. 2 telecoms operator by revenue size, operating profit and subscriber number.

SoftBank's Ba1 rating is based on assessment of the company's standalone financial strength. Moody's views the operation of Sprint and SoftBank as substantially separate. Albeit both companies will share a central strategy, they operate in two separate geographic areas with limited synergies. Additionally, there is no explicit support provided to Sprint.

The ratings assessment assumes the acquisition provides no meaningful financial benefit to SoftBank during at least the first two years of ownership. As a stress case, Moody's also assessed SoftBank's financial profile assuming SoftBank will fund, through its standalone cash flow and debt incurrence, Sprint's negative free cash flow over the next two years. In regard to this stress scenario, Moody's notes Sprint may be able to fund much of this capital spending through external funding that SoftBank has noted substantial synergies associated with the acquisition -- primarily in the purchase of equipment and handsets.

Moody's estimates the level of SoftBank's consolidated gross debt (excluding Sprint's existing debt) to be around JPY4.8 trillion after including the US$21.6 billion in new debt raised to pay for Sprint. It results in debt/EBITDA coverage of around 4.2x, which is a coverage ratio typical for a single-B company.

Moody's Ba1 rating of SoftBank also considers the probable financial support that it will extend to Sprint 's capital investment program over the coming two years. This capex program is designed to upgrade its facilities, which will be critical for turning around Sprint.

SoftBank has improved its financial metrics in the last two years, especially its ability to generate higher EBITDA on the back of stronger revenue growth and a steady improvement in its operating margin despite heightened competition. The company's reported EBITDA margin was 32.4 % for FYE3/2013 compared with 30.4% in FYE3/2012. Interest coverage of reported EBITDA less capex improved to 14.9x from 8.3x during the same corresponding period.

On the other hand, the acquisition will cause adjusted debt/EBITDA to deteriorate to around 4.2x in FYE3/2014 due to the large increase in debt. In Moody's stress scenario that assumes if negative cash flow continues at Sprint, the ratio would further rise to 4.6x if including the additional debt (totaling approximately US$11 billion for FYE3/2014 and 3/2015) to Sprint for its capital spending. But the ratio should fall back to around 3.0x in FYE3/2016 if SoftBank maintains its stable operating performance in its home market and generates sufficient cash flow from operations to cover its own annual capital expenditure projected to be JPY780 billion for FYE3/2014 and JPY580 billion for FYE3/2015 by the company.

The stable outlook reflects Moody's view that the company will maintain its position as the No. 2 telecommunications company in Japan. This strong position supports steady revenue and EBITDA growth, such that the company can adequately service the debt added by the Sprint acquisition as well as further support for its transformation in Moody's view.

SoftBank's rating could face upward pressure if it continues to improve profitability and reduces leverage, such that its adjusted EBITDA margin stays above 35% and adjusted debt/EBITDA remains below 2.5 x. In addition, the company will need to demonstrate a continued trend of excellent liquidity and access to capital markets. Any upgrade will also be dependent on the successful implementation of the company's business plan for Sprint and a reduction in potential support from SoftBank.

In light of the enormous investment made, negative pressure on SoftBank's rating could emerge if progress in improving Sprint's financial and operational profile does not emerge. Sprint is not expected to generate positive free cash flow until 2015 but other metrics will provide guidance as to the success of the company's efforts. These include increased profit margin, increased subscriber numbers and/or low and trending downward of postpaid churn. Downward rating pressure could also emerge if SoftBank's adjusted EBITDA margin falls below 30%, or if the company's adjusted debt/EBITDA does not trend down to below 3x from Moody's current expectation of between 3-4x for the coming three years. A significant change in SoftBank's position in the Japanese mobile communications market would also lead to negative pressure, as would any significant acquisitions or share buybacks.

The principal methodology used in this rating was Moody's "Global Telecommunications Industry," published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

SoftBank Corp. headquartered in Tokyo, is a holding company that owns leading global providers of various services, including mobile and fixed-line telecommunications, broadband, software distribution, networking and publishing.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peggy Furusaka
VP - Senior Credit Officer
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Richard Bittenbender
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades SoftBank to Ba1 from Baa3 with stable outlook
No Related Data.

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