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Noble shares in a deep funk after double dose of bad news

S&P warns of unsustainable capital structure; Sinochem said to have withdrawn interest in acquiring stake

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Noble Group on Tuesday slid back to the deep chasm it has been trying to claw its way out of for the past two years, as credit rating agency S&P Global Ratings further downgraded the commodity trader and news broke that Chinese state-owned conglomerate Sinochem was no longer interested in investing in the firm.

Singapore

NOBLE Group on Tuesday slid back to the deep chasm it has been trying to claw its way out of for the past two years, as credit rating agency S&P Global Ratings further downgraded the commodity trader and news broke that Chinese state-owned conglomerate Sinochem was no longer interested in investing in the firm.

All eyes are now on the group's ability to replace a credit facility with a US$2 billion borrowing base facility, and the results of a strategic review led by its new chairman, Paul Brough. Meanwhile, the market is abuzz with speculation on who else might be interested in investing in Noble at bargain prices.

S&P on Monday night cut its long term rating on Noble by three notches from B+ to CCC+, and warned of more trouble ahead.

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In what some deemed to be an unusually strong statement, S&P said there is "potential that the company will face distress and a non-payment of its debt obligations over the next 12 months."

"The company's capital structure is not sustainable," it added, pointing to Noble's poor cash flows and profitability, and probably weakened access to funding following its loss for the first quarter. The damning S&P note followed a news report on Monday that Sinochem was no longer pursuing an investment in Noble due to concerns over its finances.

Citing three anonymous sources, Reuters said that Sinochem has turned cautious on Noble after the latter announced a shock loss for the first quarter of this year.

The bad news pummelled Noble's shares and bonds on Tuesday. The stock dived at the opening bell, and was trading at 42 Singapore cents - down 16.5 cents or 28 per cent from the previous market close - when the group called for a trading halt half an hour into the trading session; the counter has lost 75 per cent of its value so far this year.

Noble's 6.75 per cent bonds due 2020, which have fallen by than half their value in the past month, plunged 15 per cent to trade at 38.5 cents on the dollar, for a yield of 51 per cent.

Todd Schubert, managing director of fixed income research at Bank of Singapore, said the bonds are now trading at "distressed levels". This, given its loss of US$129.3 million in the first quarter and the unusually negative comments from S&P, is not surprising, he added.

"Clearly, Noble needs to stem the negative momentum," he said. "Its business model requires ongoing access to capital, and a loss of investor confidence could lead to increased difficulties accessing liquidity, further exacerbating the already downward spiral."

"A major investment from a strategic partner would be the type of grand gesture that could boost liquidity and more importantly boost overall sentiment and perception," Mr Schubert added.

S&P's warning came in the wake of other downgrades. Moody's Investors Services downgraded Noble further into junk territory last Monday, while Fitch followed suit the next day by cutting its long-term rating on the company to BB- from BB+.

S&P said in its note that Noble has three major debt obligations maturing in the next 12 months. Firstly, it has US$656 million due this year, of which US$620 million are borrowing-base facilities due in June. The firm has US$379 million under a medium-term note programme due in March next year, and another US$1.1 billion in revolving credit facilities due in May next year.

The group also has bonds maturing in 2020 and 2022.

Noble is currently seeking a new US$2 billion credit facility from its lenders before the US$620 million amount comes due next month, according to Bloomberg, which reported that Mitsubishi UFJ Financial Group is arranging the 364-day facility.

Noble chief financial officer Paul Jackaman had said two weeks ago that the firm is in talks with banks for the facility that has been extended to the end of June.

Morningstar analyst Lorraine Tan said replacing the facility will be Noble's first priority, in order that it can continue to fund trades in its energy and gas and power segments.

The group's failure to bring in a strategic investor with a strong balance sheet was disappointing, said Ms Tan. "Noble needs access to a stronger balance sheet for it to be able to get financing to grow its trading business."

Despite reports of some banks pulling out of the talks, DBS analyst Mervin Song is optimistic Noble will achieve the refinancing - albeit probably with a facility of a smaller size and higher interest rates - due to the backing of Chinese sovereign wealth fund China Investment Corporation (CIC).

"As long as CIC is there, (Noble) will get some money," said Mr Song. CIC, which has a 9.6 per cent stake in Noble, is the group's fourth largest shareholder.

Meanwhile, Religare Capital Markets director of research Nirgunan Tiruchelvam believes that other players might still be interested in Noble despite Sinochem walking away.

"There are several commodity players and deep value investors that may see an opportunity," he said. Noble's shares could also bounce back if the management is able to reassure the market, he added, noting that share prices of commodity traders are often volatile.

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