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Update: Noble's troubles seep into its bonds: Markit

Thursday, August 13, 2015 - 11:22
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Noble Group's troubles have spread from its stocks into its bonds, according to Simon Colvin, a research analyst at financial information services Markit.

NOBLE Group's troubles have spread from its stocks into its bonds, according to Simon Colvin, a research analyst at financial information services Markit.

Mr Colvin said accusations of accounting irregularities and the continuing global commodities slump have seen the credit markets turn bearish on the Hong Kong-based commodities group.

Noble's credit default swaps (CDS) spread has tripled in the last 12 months. The latest 5 year CDS spread stands at 714bps, the highest level since 2009. 

"This jump came in two waves which occurred in March, when Iceberg's allegations first came to light, and July when the commodities slump started in earnest,'' he said.

The bearish sentiment seen by Noble's CDS spread has also been felt by Noble's bonds, which have seen their yields shoot up in recent weeks. The entirety of the firm's yield curve has widened in the last 12 months, according to Markit's evaluated bond service. 

Markit noted that the widening has been most extreme at the long end, where the 30 year yield recently jumped above the 8 per cent mark for the first time ever in the closing week of July. This means that Noble's longest dated bond, the 6.95 per cent 2045 issue, is now yielding 8.3 per cent after having seen its price fall to 85 cents on the dollar since listing in March, according to Mr Colvin.

"This increased bearish sentiment towards Noble's bonds could limit the firm's strategic options going forward as both the equity and debt portion of its balance sheet have come under pressure,'' the analyst said.

Noble has lost more than half of its market value since February this year when Iceberg Research questioned its accounting policies as well as criticised the firm's poor disclosure and lack of transparency.

Noble eventually engaged PricewaterhouseCoopers (PwC) to review the valuation of its contracts. On Monday, PwC said "Noble has adopted an approach to valuations which is consistent with the relevant criteria in all material respects".

But the assurance provided little comfort to the market, which continued to sell the stock. Critics said the PwC review revealed nothing new and failed to address market concerns, including the controversial accounting treatment and valuation of its Australian subsidiary Yancoal.

As the Yancoal valuation is an equity one, it was not part of PwC's assurance review which covered mostly the long-term and Level 3 mark-to-market (MTM) contracts. Under the US Financial Accounting Standards, 'Level 3' inputs are considered 'unobservable' due to the lack of data.

However, The Business Times understands that derivatives contracts that are related to Yancoal, if they were of more than 2 years duration and held at Level 3 inputs, would have been tested in the review.

At 03:25pm on Thursday, Noble was trading around S$0.50 a share, down half a Singapore cent, or almost 1 per cent. More than 66 million shares changed hands.

On Wednesday, credit rating agency Moody's affirmed Noble's Baa3 rating - the lowest level of investment-grade ratings - but changed its outlook to "negative", which indicated a higher likelihood for a ratings downgrade.

"Noble's ratings outlook was changed to negative, because first-half results indicated higher leverage and lower interest coverage, with a weaker liquidity profile that is less supportive of its current Baa3 issuer rating," Moody's analyst Joe Morrison said in the report.

Standard & Poor's, which cut its outlook on Noble to "negative" from "stable" in June, said it is keeping its "BBB-" rating and outlook on Wednesday.

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