Japan’s Biggest Banks Are Having Second Thoughts About Lending To SoftBank After WeWork Debacle

If we’ve learned anything about Masayoshi Son, the eccentric Japanese billionaire behind SoftBank, over the past few months, it’s that Japan’s most famous business clearly has trouble differentiating between luck and skill.

This, as Professor Scott Galloway explained yesterday, is a common problem in the world of Venture Capital: In Galloway’s estimation, many investors exemplify what’s called the Dunning-Kruger effect. This posits that dumb people are too stupid to know they are dumb, allowing them to remain colossally overconfident. The effect also includes people who mistakenly believe their expertise in one area translates into expertise in another area or all areas.

This is probably one of the many concerns running through the minds of Son’s longtime Japanese bankers, as they reevaluate their ties with one of their most important clients, Bloomberg reports.

And who can blame them? All together, Japan’s biggest banks have billions of dollars in exposure to SoftBank. And now, the firm is returning to its financiers for another round of lending, but this time, it’s coming in the wake of the company’s most embarrassing year on record.

SoftBank has had an almost singularly terrible year. The company has had problems with more than a dozen investments, with the biggest flops being WeWork and Uber, though WeWork, which is now the subject of an anxiety-provoking turnaround plan following an emergency lifeline loan from its biggest backer for more than $6 billion, stands out as a particularly massive and predictable disaster (if only Masa read Zero Hedge…).

There’s now plenty of evidence to suggest that SoftBank’s investment process is deeply flawed. Even Son himself has said he decided to invest after talking to CEO/Svengali Adam Neumann for 20 minutes. He committed billions of dollars of both SoftBank money and money from his now infamous Vision Fund. After one 20 minute face-to-face meeting. How is that even legal?

SoftBank’s latest fuck-up hit the financial press in Monday’s edition of the Financial Times. Oyo, one of SoftBank’s biggest bets, is facing backlash in China, where a letter signed last week by 172 hoteliers across China accuses the company of imposing “unclear bills and arbitrary deductions” and threatens legal action if their complaints aren’t swiftly resolved, which sounds…ominous.

(This chart courtesy of Barron’s)

That’s a huge problem, because Oyo’s valuation jump in a funding round closed over the summer helped provide some respite to SoftBank as Oyo’s valuation doubled to $10 billion.

Masayoshi Son

And after investors balked at WeWork’s IPO because of the hilariously non-standard governance issues, Neumann, who tried to engineer things so that his family would control WeWork for “the next 300 years” was pushed out with a massive golden parachute, which was like adding insult to injury.

The banks that SoftBank has approached for its next big loan would see their total exposure to SoftBank climb to $15 billion if they decided to back the deal. These banks include most of the usual suspects: Mitsubishi UFJ, Sumimoto and Mizuho.

SoftBank reportedly met with all three on Nov. 26 to discuss the credit facility, according to BBG’s anonymous sources. WeWork executives reportedly went over their plans to save the company with their bankers. This is important, as several bankers have reportedly told BBG that they would be hesitant to continue lending to SoftBank unless it can develop a credible turnaround strategy for WeWork.

Among all the SoftBank investing blunders that led to this, the near-collapse of WeWork looms largest in bankers’ imaginations.

“Japanese banks have provided loans in part because of Son’s management power and capability,” said Kazumi Tanaka, an analyst at DZH Financial Research Inc. “The WeWork issue has chipped away at one of the elements that convinced them” to back Son, Tanaka said.

At the end of the day, we doubt the Japanese banks will pass on SoftBank, and this is why: Son is still one of the biggest fish in Asia’s second-largest economy.

But just in case, it appears Masa is playing it safe by beginning to diversify his banking business across the Pacific. To wit, Goldman is reportedly arranging a $1.75 billion line of credit as part of WeWork’s rescue package. SoftBank is listed as the primary borrower in that deal, and who knows? Perhaps Goldman is betting on Son and is trying to steal his business away from its Japanese rivals.

Another reason it will be difficult for Son’s bankers to pass up another loan: With the Japanese economy as starved for yield as it is, SoftBank’s credit rating is BB+, which is a notch below investment grade. In other words, “Japanese banks may be getting more concerned, but they still have to provide more support,” said business school professor and former investment banker Michiaki Tanaka.