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Noble Group battles falling markets as short-selling hits new pitch

[SINGAPORE] Noble Group's attempts to shore up its Singapore-listed shares since June have run into massive selling as Asia's biggest commodity trader battles waning investor confidence in its prospects and mounting pressure on its credit ratings.

Between June 11 and July 24, Noble bought back its shares 11 times and paid S$131.1 million for its purchases. But that failed to deflect waves of selling that drove its shares down by more than 10 per cent on both Thursday and Friday. Investors in Noble include China Investment Corp and BlackRock.

Weaker commodity prices had dimmed the outlook for Noble's earnings. Then earlier this year the group was accused of inflating its assets by billions of dollars in reports by Iceberg Research, and later by short-seller Muddy Waters. Noble rejected those claims, but that failed to stop its shares from losing nearly two-thirds of their value since mid-February.

Investors have been monitoring the short interest on Noble's stock. The percentage of outstanding shares on loan had risen to 12.01 per cent on July 29, from 0.1 per cent in mid-February before Iceberg issued the first of its three reports, data from London-based financial information services firm Markit shows. "The talk is that if the short interest hits 10 percent, it will be a tipping point for sentiment," said a Singapore-based analyst who declined to be identified.

The short interest coincides with a period in which Noble is not allowed to buy back its shares. Singapore forbids share buybacks in the two-week period before a company reports its quarterly results. Noble's earnings are due on Aug 13.

On Friday, the shares tumbled as much as 16 per cent to yet another 6-1/2-year low of S$0.435, following a steep decline in heavy volume on Thursday that prompted the Singapore Exchange to issue a 'trade with caution' note.

Noble had said it wasn't aware of any information as to why its shares had fallen more than 10 per cent on Thursday.

Noble's bonds have also weakened and its credit default swaps contract has risen as markets worried about a deterioration in the company's credit rating.

Noble's bonds due 2020 traded down 2-3 points at 97.25/98 on Friday. Its perpetual bonds, which investors say have the weakest structure in their category, are trading at 69/70 cents on the dollar. That was a deep discount to the price at which they were initially issued.

Traders said Noble's bonds are the most sought-after in the repurchase agreement (repo) market where investors who hold a negative view on Noble but do not own its bonds, borrow securities for short selling in the debt market.

Standard & Poor's cut Noble's credit rating outlook to negative last month, citing concerns about valuations of its long-term contracts. However, the agency reaffirmed Noble's credit rating of BBB-minus, the lowest investment grade.

Fitch and Moody's both have Noble's rating at the lowest investment grade rating level.

An investment grade rating is especially key for commodity traders as they mainly rely on bank funding for their day-to-day operations. "The challenge remains the same - it is difficult to analyse the credit risk," said one Hong Kong-based fund manager.

According to S&P's definition, a negative outlook means a rating downgrade could happen in the next six months to two years.

With revenues of US$86 billion last year, Hong Kong-based Noble is one of Asia's largest companies to find itself in a reputational battle over accounts where consequences can be long-lasting.

Noble has hired PricewaterhouseCoopers (PwC) to review how it values some of its commodity assets. PwC's report will be released on the same day as Noble's second-quarter earnings.