Noble's options narrow as saga heads for March 20 bond maturity crunch

London

THE moment of truth is approaching for Noble Group Ltd.

Nearly a year after a shock trading loss sent it spiralling toward collapse, the commodity trader is racing to reach a deal with a group of senior creditors before a US$379 million bond maturity on March 20, according to people familiar with the matter.

"The clock is really ticking," said Jean-Francois Lambert, a consultant and former head of commodity trade finance at HSBC Holdings Plc. "The domino effect of default would be like a tsunami."

The March 20 bond maturity is shaping up to be the denouement of a drama that began more than three years ago when then-unknown Iceberg Research started publishing critiques of Noble's accounting. Since then, the company has shrunk to a shadow of its former self, battered by trading losses and massive writedowns.

On Monday morning, Noble announced that it had decided not to pay a coupon on its 2022 bond that was due on Friday. While it has a 30-day grace period on the coupon, there is no such grace period on the 2018 bond maturity, according to the prospectus.

The company also said on Monday that it was "very close" to reaching final terms on a restructuring deal with a so-called ad hoc group of largely hedge fund creditors, after announcing a preliminary agreement in late January to halve its debt. A group of perpetual bondholders has meanwhile submitted an alternative proposal, which could potentially have an impact on the talks.

Even if it can secure a firm agreement before March 20, Noble's options are narrowing.

It's still possible the company could decide to repay the bond, a Hong Kong restructuring lawyer told Bloomberg last week.

Still, after missing the coupon payment, the market is not pricing in much chance that it will do so: the 2018 bonds are trading at roughly the same price as Noble's bonds maturing in 2020 and 2022; and at 52 cents on the dollar any investor buying the 2018 bond today would almost double their money in a week if the company did repay on time.

Even with a deal, the road ahead looks tricky. The creditors in the ad hoc group are likely to agree not to take any legal action to enforce their claims against the company as part of the planned "restructuring support agreement", but the deal won't cover all investors in Noble's debt until it has been implemented through a scheme of arrangement - a process that's likely to take months.

In the meantime, not paying the 2018 bond on time would constitute an event of default, according to the bond's prospectus. That could be avoided through a vote at an extraordinary general meeting of the holders of the bond - but the company must give 21 days' notice of any such meeting, according to a copy of the trust deed. Alternatively, holders of 90 per cent of the bond would need to agree in writing.

It's not clear how much of the 2018 bond the ad hoc group holds. The company has said that the ad hoc group holds about 36 per cent of its total US$3.45 billion in unsecured debt, and that other creditors holding a further 15 per cent "have indicated their broad support".

Two people familiar with the situation, who asked not to be identified discussing private deliberations, said Noble could decide to continue trading even after a default on the 2018 bond, on the basis that its deal with a large group of creditors would reduce the risk of any enforcement proceedings against it. Holders of at least 25 per cent of the bonds must request enforcement, according to the prospectus. The alternative would be for the company to seek a debt morato-rium in court, according to one of the people.

It wouldn't be unprecedented for a company to continue operating despite a default, as long as bondholders don't demand immediate repayment.

"If the company defaults on its bonds on March 20, that would be a black mark. But it may be more of a paper judgment," said Brayan Lai, Singapore-based analyst at credit research firm Bondcritic Ltd. He expects creditors to put in place some sort of forbearance agreement.

Still, Noble chairman Paul Brough said last month that it was "important from a customer and supplier perspective that we are seen to be compliant with our borrowing obligations", explaining why the company decided to make a coupon payment in January.

Noble executives and their rivals at other traders expect that some key counterparties could walk away from long-term contracts with the company in the event of a restructuring or default, putting further strain on the business, Bloomberg reported in November.

"Can the new company survive and rebuild credibility with its various trading parties?" asked Mr Lambert. "The jury's out." BLOOMBERG