Noble braces for first bond default

Hong Kong

NOBLE Group Ltd is racing against time to garner enough votes for a debt restructuring plan after its decision not to pay a US$379 million bond due Tuesday sets it on course for its first note default.

The failure to make payment will prompt an "event of default" under the terms of its bond documents. The company has opted for non-payment to preserve assets "for the benefit of all stakeholders during the implementation of the proposed restructuring," it said in a filing on Friday. The move will likely trigger payouts on credit default swap contracts tied to Noble and cross defaults on its other debts too, according to law firm Eversheds Sutherland.

The upcoming default is the latest development in a closely watched drama that began in 2015 when then-unknown Iceberg Research started publishing critiques of the Hong Kong-based trading house's accounting. Now a shadow of its former self after being battered by trading losses and massive writedowns, Noble is working on a US$3.5 billion restructuring deal to ensure survival. A default could set in motion legal proceedings against the trader.

Noble's shares plunged in Singapore on Monday as investors weighed the consequences of the trader's decision not to pay the 2018 notes. The stock sank as much as 20 per cent to 11.1 Singapore cents, the lowest since 1999. Its 2018 and 2022 bonds were largely unchanged.

"If there are enough 2018 holders who have not signed up to the restructuring support agreement or some form of soft forbearance arrangement with the company, there is a risk that some of them could collectively take action against Noble in courts to push for payment," Brayan Lai, Singapore-based analyst at credit research firm Bondcritic Ltd, said on Monday.

Under the bond documents, the trustee has the discretion to institute legal proceedings against Noble upon default, but will normally only do so if it is indemnified by noteholders against its anticipated costs and associated risks in taking such action, according to Kingsley Ong, a Hong Kong-based partner at Eversheds Sutherland, who specialises in debt restructuring and credit derivatives.

The trustee for the 2018 bond is DB Trustees (Hong Kong) Ltd, according to the bond document. Amy Chang, spokeswoman for Deutsche Bank AG in Hong Kong, said the lender has no comment on whether any action will be taken.

Mr Ong said: "It's uncertain if the trustee will take such enforcement action (or be asked by any noteholders to take such action), in view of Noble's current restructuring proposal," according to a written interview. Technically, though, the trustee could commence insolvency proceedings in the courts in the event of default, which could derail Noble's plan to have the workout done outside of the courts, he said.

In the same announcement, Noble also said it won't pay a coupon due March 9 on US$750 million of bonds maturing in March 2022. While it has a 30-day grace period on the coupon, there is no such window on the 2018 bond maturity, according to the prospectuses. The markets hadn't priced in much chance it will pay the 2018 notes.

Noble last week inked a binding pact with a senior creditor group holding 46 per cent of its senior debt, and is seeking more to sign on to the deal to meet the 75 per cent threshold by value and 50 per cent by number of creditors.

A default on its debt could have significant consequences for Noble if it prompts trading counterparties to walk away from contracts. Paul Brough, Noble's chairman, told investors last month that it was "important from a customer and supplier perspective that we are seen to be compliant with our borrowing obligations".

"If they default, in theory they can still operate as normal but some customers may have clauses which they can exercise and stop trading with them," said Annisa Lee, head of Asia ex-Japan flow credit analysis at Nomura International (HK) Ltd. BLOOMBERG