Noble's ugly duckling is no Singapore swan in disguise: Gadfly

[SYDNEY] What goes down, usually goes up. And when it comes to the Singapore stock market, that tends to happen in just 12 months.

Since 2001, the worst-performing stock on the Straits Times Index in any one year has bounced back in eight of the subsequent 14. An investor who bought the most luckless stock and held it until the next New Year's Eve received an average return of 81.5 per cent in those eight years, and lost just 13.6 per cent in the periods when the punt didn't work.

Profitable as it has been, the trend may not work in favor of investors in commodity trader Noble Group, whose 65 per cent slump last year was the worst performance of any of the 30 shares on the city-state's benchmark index.

With Standard & Poor's joining Moody's in cutting Noble's credit rating to junk, shareholders have suffered a further 20 per cent loss so far in January. What's worse, the pessimism in the bond market is making a rebound highly unlikely in the absence of either a major corporate restructuring or a miraculous revival in prices of steel, oil and other raw materials.

Neither possibility is on the horizon. Noble, which spent much of last year fending off attacks on its accounting practices by an anonymous research firm and a short-seller, recently sold the remaining chunk of its agriculture unit to China's Cofco to address concerns about a liquidity crunch. But even that US$750 million sale failed to impress. The company's bond due in 2020 dropped to a record low of less than 53 cents to the dollar on Friday. Among similarly priced bonds, Noble's has the highest one-year probability of default, according to a Bloomberg risk model.

Chief executive officer Yusuf Alireza's view that losing the investment-grade rating wouldn't push the company over the brink is probably right, provided Noble's counterparties don't ask it to post too much more collateral to cover its trades. How much more is too much? S&P says the company's cash sources over the next 12 months may cover its projected cash use by less than 1.5 times, a deterioration from before. Liquidity is "adequate," but not "strong," the rating company says.

Those wanting to defend against non-payment over the next five years would have to pay almost US$3.1 million right away for credit-default protection on every US$10 million of Noble's debt.

Lend the same amount to another Asian commodities trader, Mitsui & Co, and you're betting on debt regarded as so safe that the CDS counterparty has to pay you money, to the tune of about US$29,000.

As Bloomberg News reporters Christopher Langner and David Yong reported on Friday, Noble has now become the riskiest company in Asia for bondholders to hedge against non-payment of debt. Moreover, the cost of protection is higher in the short term than after 12 months, an unusual inversion in the swap curve that suggests investors are betting distress could come sooner rather than later.

With US$3.61 billion in debt maturing this year, including 1 billion yuan (S$217.9 million) and 300 million Malaysian ringgit (S$98 million) in bonds due by the end of this month, according to data compiled by Bloomberg, the year ahead is going to be quite a tightrope walk. For Noble's equity investors, last year's ugly duckling is unlikely to be 2016's handsome swan.

BLOOMBERG