Masa's $3.7 Billion Bonfire: SoftBank Posts $7 Billion Loss After Torching Deposits On AI Power Gear As Interest Costs Double

Buy now, figure out the specs later. That, in one line, was SoftBank's strategy for powering the biggest AI data center buildout on the planet. And on Tuesday, it sent Masayoshi Son the invoice: SoftBank Group reported a net loss of ¥1.12 trillion ($7.1 billion) for the July-September quarter, its first loss in almost two years, when Wall Street was looking for a profit of ¥129 billion. The biggest single culprit was a ¥597 billion ($3.7 billion) loss on power generation equipment that the OpenAI backer had rushed to reserve for its US data centers, led by the 8 gigawatt campus in Pike County, Ohio... and then decided it didn't need after all, non-refundable deposits and all.Regular readers know that we have been warning since last October that the AI buildout runs on debt, and that SoftBank, which has now sunk $64.6 billion into OpenAI, is the poster child for that thesis. Just one month ago we watched Masa pass the hat in the Gulf after maxing out junk bonds, margin loans and Japanese retail. Today's numbers show what all that borrowing has been paying for, and it is probably worse than even we expected.Goldman's Japan desk (available to pro subs) filed the print under "MISS", which may be the understatement of earnings season, and broke the damage into three buckets: the data center impairment, a surge in financing costs to ¥462 billion in a single quarter, and a ¥304 billion investment loss at the holding company on Intel and Coupang, only partly offset by gains at the Vision Funds. As the desk summarized:MISS | Parent aggregate loss of Y1.12 mostly around accounting and financing cost increase:1/ Y597B impairment charges around US data center impairment linked to bottleneck and delivery disruptions in procuring power generation;2/ Financing cost surging to Y461.9B (domestic/foreign interest rate);3/ Broader holding company posted an overall net investment loss of Y303B (Coupang, Intel) and valuation compression for unlisted assets partially offset by SVF1/SVF2 generated investment gains of Y242.5B.SoftBank stock had closed up 13.9% in Tokyo before the results, riding the latest AI rebound. After the numbers hit, it was indicated 4.3% lower in after-hours trading, according to Goldman. The shares are still down more than 50% from their June record, when SoftBank was briefly Japan's most valuable company.$9.5 Billion Paid, $3.7 Billion GoneThe mechanics of the write-off are worth a closer look, because they are a perfect miniature of the entire AI capex frenzy.Through a subsidiary called Silver Bands 7 (SB7), which is co-owned by SoftBank and Vision Fund 2, the company spent the past year and a half writing checks to equipment makers to reserve manufacturing slots and buy power generation gear, long before the projects that would use it were finalized. According to the financial report, cumulative payments reached ¥1.5 trillion ($9.48 billion) by the end of September.Then came the review. SB7 "revised its equipment procurement strategy" as project requirements changed... and the bill for changing its mind came in two parts:¥457 billion ($2.85 billion) of advance payments for manufacturing capacity and equipment that are simply gone, because they were non-refundable;¥140 billion ($0.88 billion) for modifying and settling contracts, cash that hasn't even left the building yet (payments start this quarter).Put differently, 30 cents of every dollar SoftBank prepaid for AI power equipment has been vaporized, and that is before the settlement checks go out. What's left, about $6.6 billion, has been assigned to the Ohio campus and "other" projects, which are now mothballed pending an IPO which may never come (as discussed here).As for the consolation prize: SB7 "may" receive rebates of up to $2.1 billion on future equipment purchases over the next ten years, subject to conditions. SoftBank's own accountants were so impressed that they declined to book a single yen of it as an asset. Translation: lose $3.7 billion today, get a coupon for your next turbine.CFO Yoshimitsu Goto told reporters that fierce competition for energy supply had pushed the company to order before long-term specifications were nailed down, and that the Ohio project is not being downsized. He would not say which vendors were involved or what exactly changed, and (well, at least he's honest) he could not promise that similar impairments won't happen again. He did describe what comes next: “a thorough reassessment.”The irony is that on paper, this is the one AI project doing power the way we have long argued every data center should: behind the meter, with 9.2 gigawatts of new gas-fired generation built on site at a former uranium enrichment plant. Right idea, wrong balance sheet. When you are funding turbine reservations with bridge loans, any change of plan gets very expensive, very fast.The cancellations were vividly summarized by a popular Japanese IR account, which did not mince words about ¥600 billion going down the drain:"No Such Default"Which brings us to the tweet that started it all. Last Friday, Elon Musk, no fan of Stargate or of anyone who writes checks to Sam Altman, dropped a one-liner on X:As we noted on Saturday, Musk provided no evidence, and SB Energy had said back in May that it had reserved enough turbines from multiple suppliers, including GE Vernova. The market didn't wait for proof: SoftBank stock, which had already plunged 14% in Tokyo that day, kept sliding, and its 5-year CDS blew out to 466 basis points, the widest since October 2022.It closed Tuesday just under 500bps - the highest in more than 4 years.Asked about it on Tuesday, Goto said SoftBank has no idea what Musk meant and that there is "no such default."Technically, he is right. A default means you don't pay. SoftBank did pay, some $9.5 billion in fact, and then told its suppliers to keep $2.85 billion of it for equipment it no longer wants, with another $880 million to follow for their trouble. Whether you call that a default, a cancellation or a "revised procurement strategy" probably depends on whether you are the CFO or the guy who read the tweet. Four days after being called wrong, Musk turned out to be directionally right about the only thing that mattered: SoftBank is walking away from power equipment orders.There is a silver lining for everyone else, as we pointed out over the weekend: turbine delivery backlogs currently stretch into 2030, and every slot Masa hands back is one somebody else can use. Maybe even somebody with cash.Lose On The Stock, Lose On The Hedge: Masa's Intel TradeNow for the arcane stuff, and there is plenty of it. Start with Intel.SoftBank bought 87 million Intel shares for $2 billion last year. By the end of March the stake was worth $3.8 billion, and by the end of September $10.5 billion, good for a ¥1.06 trillion gain in the first half. Instead of selling, in August SoftBank did something much more, well, SoftBank: it raised $7.35 billion through prepaid forward contracts on its entire Intel stake, structured as collars with a floor and a cap. In plain English, it borrowed more than three times what it paid for the stock, pledged every share, and sold away the upside above the cap to pay for the downside protection.What happened next? Intel shares kept climbing after the ink dried, which means the capped contracts moved against SoftBank, to the tune of a ¥322 billion ($2 billion) derivative loss in less than two months. And because Intel still finished the September quarter below where it started, SoftBank also booked a ¥270 billion valuation loss on the shares themselves.So in a single quarter Masa managed to lose money on the stock and on the hedge. That takes talent.The fine print is even better: of the ¥1.65 trillion of Intel shares pledged, the banks have "rights of use" over ¥1.1 trillion, meaning they are free to lend out or otherwise use SoftBank's collateral.The Intel money, of course, was already spoken for.Borrowing To Repay BorrowingReaders will recall the record $40 billion bridge loan SoftBank lined up in March to fund its latest $30 billion check to OpenAI. The good news is that it's gone: SoftBank drew $30 billion, repaid all of it by Sept 15 (six months early) and cancelled the rest. The bad news is how.The bridge was taken out with:a new $11.87 billion two-year term loan;the $7.35 billion Intel collar above;another $5 billion on the margin loan backed by Arm shares, which now stands at ¥3.9 trillion (about $25 billion), secured by 769 million Arm shares and extended to 2028;and, for the rest, presumably some of the cash from its bond-selling spree, which included the largest junk bond in history.In other words, a one-year loan was replaced with a two-year loan, a pawned chip stock, a bigger margin loan and more bonds. Goto said the banks viewed the early repayment favorably, and why wouldn't they: the fees on all of the above must have been spectacular.By SoftBank's own count the September quarter was the biggest financing quarter in its history, roughly ¥9 trillion ($56.5 billion). Over six months the group raised ¥17.2 trillion and repaid ¥9.7 trillion. Consolidated interest-bearing debt jumped by ¥7.9 trillion since March to ¥32.6 trillion, while the equity ratio dropped to 23.6% from 29.0%. Operating cash flow for the half was negative ¥527 billion, investing cash flow was negative ¥5.4 trillion, and financing covered the gap with ¥8 trillion to spare.Then there is the OpenAI loan. Back in May, SoftBank had to cut its OpenAI-backed margin loan target by 40% to $6 billion, and by June even that had stalled, as lenders balked at private shares in a cash-incinerating startup as collateral. Fast forward to August, and a Vision Fund 2 subsidiary borrowed the full $10 billion against OpenAI stock. What changed? According to the filing, SoftBank Group itself guarantees the loan, and it comes with a cash collateral provision and a mandatory prepayment clause that kick in if the fair value of the OpenAI preferred shares falls significantly.That's quite a clause to have outstanding just as OpenAI trimmed its valuation target to $1.25 trillion from $1.4 trillion and managed to raise only about $11 billion of the $30 billion it wanted. For the record, SoftBank carries its stake at $99.6 billion against a cost of $54.6 billion at quarter-end, a mark that hasn't moved since March, and Goto expects the new round to lift NAV next quarter. We'll see.The Landlord Who Pays His TenantOur favorite gimmick, however, is buried in the derivatives note.In January, SoftBank's SB Energy (called "Energy Global" in the filings), the developer building the Ohio and Texas campuses, granted warrants to OpenAI as a "lease incentive" for signing a data center lease in Milam County, Texas. That's right: the landlord paid the tenant, in equity, to rent the building. Some of those warrants were forfeited in August when OpenAI signed the 20-year Ohio lease, but ¥542 billion ($3.4 billion) of them still sit on SoftBank's balance sheet as a derivative liability.And here is the punchline: because the warrants get more valuable as SB Energy does, every time the data center business is marked higher, SoftBank books a loss, ¥204 billion in the first half, plus another ¥136 billion of share-based compensation for the unit's staff for the same reason. A business whose success shows up as a loss is a neat trick even by AI-bubble standards.The circularity doesn't end there:Nvidia, the exclusive chip supplier for the Ohio campus, has wired $1.5 billion to SB Energy under a share issuance agreement and is providing credit support for OpenAI on the first 4.25 gigawatts. So the chip vendor funds the landlord and backstops the tenant, who then buys the chips.SoftBank Corp, the listed Japanese telecom arm, sold its SB Energy stake to Vision Fund 2 and booked an ¥80 billion gain. One SoftBank pocket selling to another: the gain vanishes on consolidation, but it looks great at the telco.The Vision Funds, meanwhile, marked down their stakes in SoftBank's own subsidiaries, mainly SB7 (the turbine buyer) and PayPay, by ¥364 billion. That one vanishes on consolidation too.And SB Energy's IPO, which was supposed to crystallize a $50 billion-plus valuation, has been sitting on our casualty list since September.Naturally, a Japanese reporter asked Goto about "round-tripping" among AI partners. His answer, roughly, was that lenders look at credit quality and that the hyperscalers have better credit than SoftBank does. Fitch, which rates SoftBank BB+, would certainly agree, as would we, having predicted back in January that junk was where this was headed:The Bill Comes DueAll of which leads to the number that should worry SoftBank bulls far more than a one-off turbine charge.Consolidated finance costs for the six months to September came to ¥791 billion, up from ¥340 billion a year ago. At the parent, interest expense hit ¥676 billion versus ¥269 billion. Part of that is the unamortized cost of the bridge loans, expensed in one go when they were repaid early, so yes, SoftBank paid up to get out of the loan it had paid up to get into.One Tokyo strategist, Shinkin Asset Management's Kazuki Sawamura, told Bloomberg he is willing to look through the data center loss. The interest bill is another matter:“We can treat the loss from the review of the AI data center plans as temporary. The more worrying factor is the increase in financial costs,” said Kazuki Sawamura, a strategist at Shinkin Asset Management. “If investment income and the value of its holdings don’t grow steadily from here, the interest burden could squeeze earnings and heighten concern about SoftBank’s financial health.”Bloomberg Intelligence credit analyst Sharon Chen did the math on what comes next: liquidity of about $32 billion at the end of September sounds like plenty until you subtract two years of bond maturities and the final $10 billion OpenAI tranche (paid Oct 1), which leaves about $10 billion of actual cushion. Against that, annual interest is now running above ¥1 trillion and ¥1.4 trillion of senior loans come due in the year to March 2028, on top of data center spending that ran ¥1.7 trillion in the first half alone.SoftBank Group is likely to raise funds in 2027, despite liquidity more than doubling to $32 billion at the end of September. Excess liquidity is about $10 billion, after accounting for bonds maturing over the next two years and the final $10 billion OpenAI investment. Funding pressure is set to build as its annual interest expense exceeds ¥1 trillion ($6 billion) and senior loan repayments total ¥1.4 trillion ($9 billion) for the fiscal year ending March 2028. What about SoftBank's famous loan-to-value ratio, the one number Goto wants you to look at? It was 15.9% at the end of September, comfortably below the 25% ceiling. But that was six weeks, one midterm election and one AI rout ago: on the call, Goto said net asset value has since dropped from ¥59.8 trillion to roughly ¥44.7 trillion. Hold net debt constant and our napkin math puts LTV at about 20% today (it's higher now than whatever slide you are looking at). And that's with OpenAI still marked where it was in March.The credit market has done the same math, which is why SoftBank CDS has been making new highs for weeks:One Foot On The Gas, One On The BrakeGoto's message on Tuesday was that this is no longer an environment where SoftBank can be all offense, and that for now the company has to work the accelerator and the brake at the same time to keep leverage under its ceiling. For a company run by Masayoshi Son, that may be the most bearish sentence ever uttered on an earnings call.It is also coming a little late. The procurement review landed just as the political ground shifted under the entire sector: Ohio is one of the states where data center pauses are now lining up after last week's Democratic sweep, and Goto conceded that some SB Energy projects may need more time under new state leadership. Add China's Nov 4 decision to block the ABB robotics deal on its turf, Microsoft pulling the plug on Oracle rentals, and Anthropic's shrinking IPO, and it's fair to ask how much of the remaining $6.6 billion of prepaid power equipment will ever spin.The bulls will say this was a kitchen-sink quarter: the bridge is repaid, the deposits are written off, and OpenAI's new round will mark the stake higher in December. Maybe. The more likely path, in our view, is that a company with ¥32.6 trillion of debt, negative operating cash flow, a guaranteed loan against OpenAI shares and a CFO who can't rule out more impairments is back in the market for money in 2027, at whatever price the market cares to name. The $3.7 billion was the cost of changing the plan. The interest is the cost of having one.SoftBank's SB7 is the latest, and largest, addition to our running tally of AI data center dreams deferred:More in the full Goldman Japan desk earnings review, available to pro subs.