SoftBank raises $22 billion by selling Alibaba derivatives: Report

SoftBank Group Corp. has raised as much as $22 billion in cash through the sale of prepaid forward contracts using Alibaba Group Holding Ltd. shares, the Financial Times reported, citing filings it has seen.

SoftBank has this year executed the sale of about a third of its Alibaba stake through these contracts, a type of derivatives that allows the Japanese company to raise cash immediately while retaining the possibility of holding on to the shares, the report said. 

It has sold more than half its Alibaba stake through this type of derivatives, the report said. SoftBank could shrink its stake below the threshold for retaining its board seat and prevent it from including its share of Alibaba’s income in financial statements, it added. 

SoftBank Group shares rose 2.6% in Tokyo trading, while the benchmark Topix was flat. Alibaba shares climbed 4.7% in Hong Kong following a rebound in the Nasdaq 100. The e-commerce giant is scheduled to report earnings later in the day.

This way of execution, more of a delayed approach, is better than direct sale in the market as the latter “could have certain shock on stock price in the short term,” Willer Chen, an analyst at Forsyth Barr Asia Ltd. told Bloomberg News. “Still, it is a share reduction.”

SoftBank has raised money by selling derivatives linked to Alibaba shares since at least 2016, opting for such complex transactions instead of a straight sale to reduce pressure on the Chinese company’s share price. About $13.17 billion was raised through prepaid forward contracts using Alibaba shares, from new contracts, rollovers and early termination of existing contracts in the year ended March, SoftBank said in its earnings report published in May. 

SoftBank founder Masayoshi Son was an early backer of Jack Ma’s Alibaba and the Chinese e-commerce giant remains his most successful investment by far. In recent years, SoftBank has used its stake in Alibaba shares to engage in complex derivatives transactions for purposes including hedging exposure. 

A global stock market downturn has dealt a blow to SoftBank’s earnings as the valuation of its tech investments continue to slide, raising concern over its financial stability. Son has repeatedly said SoftBank has enough cash to withstand the stock market rout, but said the value of new investments could shrink to as little as a quarter of what it was a year ago. 

Banks including Mizuho, Goldman Sachs and UBS, participated in the forward sales of 213 million Alibaba shares this year, which in most cases delay the final handover for about two years, according to the FT report. 

“Softbank has been using such ‘forward sales’ to raise fund over the last few years. The investment banks arranging this derivative product do not need to sell all the shares immediately,” said Steven Leung, an executive director at UOB Kay Hian in Hong Kong.