SoftBank sells $11.1 billion of junk bonds to pay OpenAI, at up to 9.75%: about $1 billion a year in interest

SoftBank Group priced about $11.1 billion of bonds on Thursday to pay for the last piece of its OpenAI investment. The sale is made up of $10 billion of dollar notes and 1 billion euros of euro notes, according to the company's pricing announcement. Reuters called it the biggest high-yield corporate bond sale on record, and the Financial Times said SoftBank paid a steep price to get it done.

The term sheet shows exactly how steep. It also shows what the money is for: the $10 billion third and final tranche of SoftBank's $30 billion follow-on investment in OpenAI, which SoftBank expects to close on Oct. 1.

The terms

All five were sold at 100 cents on the dollar, with no collateral and no guarantee. S&P and Fitch both rate them BB+, one notch below investment grade. The notes are sold only to large institutional buyers under Rule 144A and Regulation S, so ordinary investors cannot buy them at issue. SoftBank also said it expects to cancel the $10 billion it had not yet drawn on a $40 billion bridge loan signed in March.

The number behind the number: about $1 billion a year

We added up the coupons. The dollar notes cost $941 million a year in interest ($86 million, $416 million and $439 million). The euro notes cost €75.6 million, about $86 million at the 1.1383 exchange rate SoftBank used. Together that is roughly $1.03 billion of interest a year, or a weighted 9.41% on the dollar portion.

Put another way, SoftBank will pay about a tenth of its OpenAI check in interest every year it keeps this debt outstanding, before a cent comes back from the investment.

Against the Treasury market the premium is wide. On Thursday's Treasury curve the 3-year yielded 4.99%, the 5-year 5.03% and the 7-year 5.10%. That puts the new dollar notes roughly 3.6, 4.2 and 4.6 percentage points over government debt of similar maturity. Part of that is SoftBank's rating, and part is the market it is borrowing into: the 10-year Treasury yield rose from 4.96% on Tuesday to 5.18% on Thursday, its highest close this year in Treasury's data.

Who it hits: this is what a small business pays

Here is the comparison that makes the price real. The bank prime rate, the base for most small business lines of credit, stood at 7.00% in the Federal Reserve's data this week. A business line at prime plus 2 costs 9.00%; at prime plus 2.75 it costs 9.75%.

So one of the world's largest technology investors is paying, on its longest dollar bonds, about what a contractor or a restaurant group with decent credit pays on a floating bank line. The difference is that SoftBank locked its rate for seven and a half years. A small borrower on a prime-based line does not get that; if the Fed raises rates again, their cost moves up with it and SoftBank's does not.

The wider point for anyone refinancing this fall: when a BB+ borrower of this size has to pay close to 10% for fixed money, lenders are not going to price smaller, riskier credit more cheaply. We walked through what an October hike would do to specific payroll and inventory lines in this Main Street piece.

What traders watch next

The notes are expected to settle on Sept. 29 and the OpenAI payment on Oct. 1. After that, the test is how the new bonds trade: if they slip below 100 in a rising-yield market, other large AI-linked borrowers will face a higher bar. Follow rates on our 10-year Treasury chart.

Sources: SoftBank Group, Financial Times, Reuters, U.S. Treasury, Federal Reserve via FRED. Interest totals are our arithmetic from the published coupons. This is market information, not investment advice.