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Noble loses support from DBS, co-CEO resigns

Implications of the funding cut will depend on the type of financing pulled, say market observers

2017-11-06T054045Z_1020546950_RC16BCB2B730_RTRMADP_3_NOBLE-GROUP-RESULTS.JPG
Noble Group's survival prospects appear to have turned bleaker, with a key bank reported to have cut its support.

Singapore

NOBLE Group's survival prospects appear to have turned bleaker, with a key bank reported to have cut its support. The commodity trader also announced on Monday that its co-chief executive has resigned to pursue other opportunities.

DBS Group has sold its US$60 million stake in Noble's US$1.1 billion revolving credit facility (RCF) due in May next year, and closed other financing to the company, Bloomberg reported, quoting an unnamed source.

It is not clear what other financing DBS has pulled; the bank declined to comment.

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DBS, along with ING Bank and Societe Generale, have been key bilateral banks providing support for the group during its business restructuring, Noble's chairman Paul Brough said in August.

ING and Societe Generale also declined to comment.

The distressed commodity trader said that, with the resignation of its co-chief executive Jeffrey Frase - effective the same day - the firm will now be headed by co-chief executive William Randall, who will now head the firm and remain as executive director.

The departure of Mr Frase, who was also the global head of oil liquids, follows Noble's sale of its oil-liquids business to Vitol. Noble said that, with this deal to be completed by the end of this year, Mr Frase decided to leave to focus on other opportunities where his market knowledge and network can be leveraged.

How big an impact the loss of DBS' support would have on Noble would depend more on the type of other financing that was pulled, market observers said, as the sale of the stake in the RCF means that someone else will continue to lend in DBS' place.

Craig Pirrong, a professor of finance at University of Houston who conducts research on the economics of commodity markets, said the cut in other financing from DBS signals a loss of confidence by the bank in Noble's prospects.

"Noble has to be concerned that this loss of confidence will spread to other lenders," he told BT. If that happens, the company's prospects are bleak, given that commodity traders - and Noble in particular - are generally dependent on bank funding to operate their businesses, he said.

The third-quarter losses of US$1.17 billion that Noble announced last Thursday undoubtedly contributed to DBS' throwing in the towel, Dr Pirrong said. "People keep looking for the bleeding to stop, but it just seems to get worse."

Noble has racked up losses exceeding US$3 billion so far this year. The management has blamed this on liquidity constraints and restrictions placed on access to trade finance lines, which has affected its ability to trade.

Senior commodities banker-turned-consultant Jean-Francois Lambert said the move by DBS to cut its RCF exposure is a "logical step", given that most other banks have also done so by selling their exposures in the RCF to funds.

"The alternative would have been to provision 100 per cent of their exposure," he told BT. "I guess the discount in selling was a bit better than that."

Pulling out trade facilities, however, is a different issue altogether. "Trade facilities are the only lifeline left to Noble for trading," he said. "Without them, what can they do?"

Revolving credit facilities are typically syndicated deals involving multiple banks, and provide liquidity for working capital; a company can draw on it as and when needed.

By contrast, trade facilities are bilateral deals, and are usually tied to specific trades or products which provide banks more security and transactional insight. They are also typically self-liquidating.

For Noble, banks have two options that they can take, said Mr Lambert.

One is to continue supporting the firm with tightly controlled, self-liquidating facilities, so as to provide time for the management to clean up its balance sheet - and keep the company afloat, for now.

The other is to withdraw all support. "But then, this is the end," he said.

Todd Schubert, head of fixed-income research at Bank of Singapore, said that what is clear is that the latest development is "a negative event for a company that can ill afford too many more negative events".

The group's third-quarter results indicate further deterioration in financial flexibility and liquidity.

"It appears questionable whether the company's remaining Asian commodity businesses can produce adequate cash flow to meet the company's debt-servicing requirements on a sustained basis."

Echoing the sentiments of many in the market, he added: "Our base case is for some sort of recapitalisation or restructuring over the coming months."

Noble's shares fell three cents, or 12 per cent, to 22 Singapore cents - its lowest in 17 years - on Monday. The stock has lost 87 per cent of its value so far this year.

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