Noble's 'short-term liquidity manageable, long term uncertain'

Singapore

NOBLE Group's liquidity position in the next two months should improve, but how its balance sheet will fare after that is still a question mark, analysts said, adding that the support of its major banking partners will be critical.

Credit rating agency Fitch said in a press release on Thursday that it believes Noble can generate positive cash flow from operations in the second half of this year. The increased working capital that the commodity group incurred in the second quarter will support its business operations going forward and allow it to generate cash flow from operations, it said.

Similarly, Barclays credit analyst Tan Jit Ming believes that Noble's liquidity needs are "largely manageable" over the next six to nine months, given that its management has said it is working to improve liquidity.

Beyond the immediate future, however, if the trend of using debt to fund business expansion continues, and Noble's cash flow from operations remains negative on a "sustained basis", Fitch's negative rating sensitivities could be breached, the rating agency warned.

For Barclays' Mr Tan, the key risk is the possibility that some banks that lend to Noble may decide not to participate in its syndicated loan next year. "That said, we believe this risk is low and manageable," he wrote in a note on Thursday. If that happens, Noble could ask for larger allocations from participating banks, or reduce the size of the syndicated loan. "We would view either of these outcomes as negative, but not necessarily critical."

Meanwhile, Noble's large buffer of extra liquidity capacity - what it calls liquidity headroom - is an "important" factor for its current ratings, said Fitch. "(But) any signs showing weakening support from Noble's major banking partners will likely result in immediate negative rating action."

Even if Noble were to lose its investment grade rating, day-to-day operations should not be materially affected, said Mr Tan. Noble has said that none of its bank lines have credit ratings, and the ratings have very little contractual impact for its suppliers.

Mr Tan thinks that "the company would take on more secured financing and utilise a larger portion of its committed lines in order to keep funding costs down". While this would be positive for Noble, higher levels of secured financing would be disadvantageous for bondholders, he noted. "Bondholders could become increasingly subordinated to the secured creditors."

But this might be a moot point altogether, as Noble expects its ratings outlook to eventually revert to "stable", said Mr Tan, and has started to shut down less profitable businesses to reduce working capital needs and reallocate capital to more profitable divisions.

The key issues for Noble are those of liquidity and confidence, Mr Tan added. "To a reasonable degree, we believe Noble has addressed concerns over its liquidity, both through the redemption of its US dollar bonds and its presentation. The company's success in addressing the confidence issue is less clear."

Echoing the same sentiments, Morgan Stanley Research said investors it spoke with felt that Noble "broadly missed the mark" and should focus instead on rebuilding confidence in its most contentious assets, especially Yancoal and level three net fair value gains on commodity derivatives.

More time could also have been spent explaining "potentially undervalued assets in its balance sheet" such as its retail energy supplier business in the US, Noble Americas Energy Solutions (NAES).

The steep fall in Noble's share price implies that investors have begun discounting assets other than those under contention too, said analysts Charles Spencer and Mean Phil Chong. These include Noble Agri and assets such as loans made to trade counterparties to secure business partnerships and long-term purchase contracts, due to the lack of disclosure on the counterparties and their credit profiles.

"We believe the discounts above have been too aggressive and present an opportunity for investors willing to look through the current volatility," the analysts wrote in a note on Wednesday. Investors suggested that if the management could demonstrate the hidden value it briefly identified in NAES, or further monetise its remaining stake in Noble Agri, this could prove to be powerful potential catalysts to the shares, they added.

Some investors have also called for Noble to re-commission PricewaterhouseCoopers (PwC) for an independent valuation on its level three net fair valuations, in order that the market can regain confidence in their carrying values, said Morgan Stanley.

In the meantime, Noble said in an update on Thursday that it has filed a summons to compel Arnaud Vagner and Enlighten Ace Ltd - the person and the company that Noble has identified to be behind the Iceberg Research blog - to file their documents and allow inspection of all "discovery documents".

Also, the Singapore Exchange (SGX), in its first statement on how it would respond to shortsellers, urged companies under attack by shortsellers or highly critical reports to provide a full response - as much and as quickly as possible.

They must "be sensitive to the severity of the situation", Tan Boon Gin, SGX's chief regulatory officer, said in the exchange's Regulator's Column.

At the same time, shortsellers and research firms should be aware that the exchange is willing to suspend trading of the stock pending the preparation of such a reply to "prevent prices from being distorted by sudden and one-sided criticism", he added. "The exchange will also take action if the criticisms contain false or misleading statements."

Noble's shares added 0.5 Singapore cent to close at 43 Singapore cents on Thursday.