[LONDON] Noble Group Ltd, the commodity trader battling criticism of its accounting, is talking to its banks about shifting the way it finances itself, pledging commodity inventories to guarantee some debt, four people with knowledge of the matter said.
The use of secured finance, a system used by several of Noble's competitors, could help the trader to boost its liquidity, reassuring the market. But some existing bondholders and lenders may see themselves relegated in potential claims.
The Singapore-listed company is holding conversations with some of its lenders about raising secured credit lines as a way to increase its liquidity, the people said, asking not to be named because the discussions aren't public. The talks are preliminary and could end without a deal, they said.
The trader has lost more than half of its value in Singapore trading since mid-February when a group calling itself Iceberg Research criticized its accounting practices. Others including short-seller Muddy Waters LLC have since joined in the scrutiny.
Even if the trading house goes ahead with some secured financing, the bulk of its credit lines would remain unsecured, according to one person with knowledge of the talks.
Noble Group Chief Executive Officer Yusuf Alireza told shareholders Aug 17 that the company has been approached by banks on potential "financing packages." The company had US$15.2 billion in committed and uncommitted credit lines at the end of the first half. Fitch Rating said on Thursday that it considered Noble's "strong liquidity headroom" an important factor supporting its debt ratings.
Noble Group is among the few commodity traders - including larger competitors Glencore Plc and Vitol Group BV - that finances itself via unsecured loans, without pledging collateral, instead relying on its creditworthiness.
Other trading houses, including Trafigura Beheer BV, raise credit by pledging collateral such as copper and oil stocks.
Noble has some room within its debt covenants to raise secured finance, according to one person familiar with the talks between the trading house and the banks.
For the lenders, a move to secured finance also has some advantages. Under the Basel III rules put in place after the 2008 financial crisis, banks have to set aside far more capital for unsecured finance than for secured loans.
Noble Group, which reported a decline in quarterly profit on Aug 8, also published a report commissioned from PricewaterhouseCoopers LLP in the wake of the criticism of its accounts. The auditor said the company complied with international rules in valuing its long-term contracts.