SoftBank faces $30B funding test as AI bets strain balance sheet

SoftBank Group reports first-quarter earnings Thursday, with analysts focused on how it will fund its OpenAI investment as leverage on its balance sheet rises.

"We think Arm has a solid credit profile but OpenAI is very weak. It's a startup with significant AI innovation risk and lots of competition," Makiko Yoshimura of S&P Global Ratings said.

SoftBank is expected to post net profit of 148.4 billion yen ($941.2 million) for the April-June quarter, according to the average of four analysts polled by LSEG. The company has committed more than $60 billion to OpenAI and related AI infrastructure projects, with $30 billion of obligations due in the second half of 2026.

The company's share price has dropped by almost half since the start of June, and the cost to insure its debt against default has soared. SoftBank has a $40 billion bridging loan maturing in March 2027 and a $20 billion margin loan on its stake in Arm, but its attempt to use its OpenAI holding as collateral has been held up as lenders grow cautious about extending credit backed by private companies.

Credit Metrics Under Scrutiny

S&P raised SoftBank's credit outlook to stable from negative in July after Arm's share price rose, reducing the ratio of debt to asset value. SoftBank has maintained a loan-to-value ratio below its self-imposed limit of 25 percent in normal times even as its OpenAI investment has grown, and it holds two years' worth of bond redemptions in cash and cash equivalents.

"As of March I can say our loan to value and cash position have been improving," Chief Financial Officer Yoshimitsu Goto said at last quarter's earnings briefing.

S&P's criteria for calculating the loan-to-value ratio include margin loans backed by investee company shares, bringing its estimated ratio at the end of March to 33 percent, compared with SoftBank's internal figure of 17 percent. The ratings agency expects this figure to have dropped to between 20 percent and 25 percent in June.

"If Arm's valuation drops, the value of the loan against it does not," said Amir Anvarzadeh of Asymmetric Advisors. "A significant drop in the price of its assets could mean a liquidity squeeze."

OpenAI Valuation and the Path Forward

Fitch Ratings has identified an AI market correction as a major credit risk, citing rising valuations, the scale of AI capital expenditure and the uncertainty of AI company returns. Competition from cheaper Chinese AI models may trigger a price war, hitting margins of frontier developers such as OpenAI as well as demand for the chips powering them.

OpenAI is reported to be seeking an IPO valuation of $1 trillion, a jump from its $852 billion valuation, although a New York Times report suggested this may be delayed to next year. Anvarzadeh said the true value of OpenAI is perhaps no more than $300 billion, judging by the smaller IPO plans of Chinese players.

"SoftBank, Arm and memory stocks are likely to continue to come under pressure until end users and corporates show that this is the beginning of a productivity surge," MST Financial analyst David Gibson wrote in a note.

Founder Masayoshi Son has dismissed talk of an AI bubble as "blasphemy," and 15 out of 20 sell-side analysts polled by LSEG had a buy or strong buy rating on the stock in August. The earnings report will test whether SoftBank can reassure investors about its funding capacity for AI commitments. Management is expected to address the $30 billion in obligations due in the second half of 2026 and the status of its OpenAI collateral loan on Thursday's call.

This article is for informational purposes only and does not constitute investment advice.