The market is signaling lingering concern that Rakuten Group Inc. isn’t doing enough to reduce debt risk and make its key mobile business profitable, judging by the tepid response to its latest fundraising step.
(Bloomberg) — The market is signaling lingering concern that Rakuten Group Inc. isn’t doing enough to reduce debt risk and make its key mobile business profitable, judging by the tepid response to its latest fundraising step.
The Japanese e-commerce firm’s perpetual dollar bonds fell for a ninth day Thursday, following news on Tuesday that Rakuten’s brokerage arm had applied to go public in Tokyo. And the cost to insure its debt against nonpayment using credit-default swaps stayed around record levels, CMA data showed.
Rakuten’s stock has rebounded 2.7% since Tuesday, but is declining 0.5% in early Tokyo trading Friday. It remains about 26% below this year’s peak in February, despite prospects the group will get more cash via a share sale by unit Rakuten Securities Holdings Inc. The stock has been weak at a time when the Topix index was hitting three-decade highs.
The competitor to Amazon.com Inc. in its home market has racked up four years of losses as its mobile-phone business drains cash. The market value of the firm founded by Harvard Business School graduate Hiroshi Mikitani in 1997 has halved, due in part to measures such as a new stock sale diluting the value of its equities.
Rakuten said the securities unit’s listing is part of a drive to speed up decision-making at each of its various businesses that range from online shopping to finance and wireless services, in a statement Tuesday.
“Based on our policy to balance investment and financial soundness without over-reliance on interest-bearing liabilities, we do not intend to increase gross debt in the future, but rather aim to reduce the balance of interest-bearing debt by implementing equity-related financing,” Rakuten’s corporate communications department said in reply to questions from Bloomberg.
“Potential sources for the redemption of interest-bearing debt are cash flow from non-financial businesses, dividends and management fees from our Fintech business, and equity-related financing,” it said.
Rakuten’s debt load increased after it decided in 2017 to enter Japan’s mobile carrier market — a year when its fortunes were flying high after starting a now-ended sponsorship deal with FC Barcelona.
The company’s bonds and borrowings from financial institutions for its non-financial businesses rose 27% to 1.83 trillion yen ($12.7 billion) in January-March from the same period a year earlier, according to Rakuten’s latest financial statement.
The Tokyo-based firm, which has about 40 million active customers — roughly a third of Japan’s population – has also listed its banking unit, as well as the share sale, since April in a bid to ease its financing woes.
“Similar to the listing of Rakuten Bank, the Rakuten Securities listing might help ease the funding pressure of the group, but it is probably just a stopgap,” said Marvin Lo, an analyst at Bloomberg Intelligence. “The underlying problem of the company is how to improve its cash-bleeding mobile business.”
Distressed Debt
The Rakuten perpetual bonds fell 0.6 cent to 63.5 cents Thursday, extending declines. Generally in credit markets, prices under 70 cents indicate distress, and more than a quarter of the company’s dollar, euro and yen notes have dropped to these levels recently.
A Japanese credit ratings firm downgraded Rakuten last month, citing uncertainty about the outlook for profitability at the mobile phone business, while shareholder Japan Post Holdings Co. said it will book an impairment charge on its stake. S&P Global Ratings cut Rakuten deeper into junk territory late last year because of slow improvement in the mobile business. It still has investment-grade ratings from Japanese credit assessors.
“I think the money raised will be relatively small compared to their most recent new share offering or the Rakuten Bank listing before that,” said Amir Anvarzadeh, market strategist at Asymmetric Advisors. “So it won’t make a big difference to Rakuten’s balance sheet.”
–With assistance from Finbarr Flynn and Aya Wagatsuma.
(Updates share moves in third paragraph.)
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