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Noble's bank debt prices signal concern that worst isn't over

For all the steps Noble Group Ltd has taken to shore up its cash, investors in its bank debt are signaling concern that the worst isn't over for the commodities trader after its ratings were cut to junk.

[SINGAPORE] For all the steps Noble Group Ltd has taken to shore up its cash, investors in its bank debt are signaling concern that the worst isn't over for the commodities trader after its ratings were cut to junk.

A parcel of about US$15 million of a group credit facility that matures on April 17 traded at about 75 US cents on the dollar last week, according to people familiar with the matter who asked not to be identified because they aren't authorized to speak to the media. The last trade on a portion of the facility occurred in December and settled above 80 US cents, the people said, without specifying the size. The parcel is part of a US$2.3 billion revolving credit line that Noble Group borrowed in 2015.

"A bank selling in the 70's is either having its own issues or is clearly worried of deeper and longer issues at Noble," said Robert Southey, who trades distressed loans as managing partner at London-based Trench Capital Partners LLP. The market sees the company "as having inability or difficulty refinancing this year, leading to debt restructuring and perhaps a haircut," he said.

Noble Group's stocks and bonds have slumped over the past year as it rejected criticism of its finances and commodity prices sank to the lowest level since at least 1991. Moody's Investors Service and Standard & Poor's have cut its credit rating to junk since late December. The firm has fought allegations about its accounting by a group called Iceberg Research, which it has said is the vehicle of a disgruntled analyst it fired.

Commodity Pain Noble Group can't comment on secondary loan trading ahead of a full-year earnings report scheduled for release later this month, according to its external public relations adviser Bell Pottinger LLP.

"That sale at about 75 US cents on the dollar is telling you that a large part of the credit market thinks that the company is going to default," said Gillem Tulloch, founder of Hong Kong- based GMT Research Ltd, who has criticised Noble Group's financials. "The market is just unfavorable towards commodity companies." Bond investors have also shown concern about Noble Group's financial health. The yield on its 6.75 per cent notes due 2020 is at 27 per cent, according to data compiled by Bloomberg. That's more than three times the average 8.85 per cent on junk notes globally, according to Bank of America Merrill Lynch indexes.

Credit Improvement Shareholders on Jan 28 approved the sale of its 49 per cent stake in Noble Agri Ltd. to China's Cofco Corp for at least US$750 million, a deal that would help improve its liquidity and creditworthiness, chief executive Yusuf Alireza has said. The Chinese food company bought the other 51 per cent stake from Noble Group for US$1.5 billion in 2014.

The weaker credit line prices "could be a function of issues like the perception of commodity companies as being vulnerable in the current market environment," said Nirgunan Tiruchelvam, director of research in Singapore at Religare Capital Markets. "Noble's credit has improved with the better cash situation." Noble Group's shares are the bargain of a decade, said Tiruchelvam, who initiated coverage of the firm last month with a buy call backed by forecasts for rising profit and sales.

The Hong Kong-based trader had US$14.2 billion of liabilities on Sept. 30, according to its latest financial report, including US$2.5 billion of bank debt and US$458 million of bonds due within 12 months.

Secondary loan traders are being more discerning as some of Southeast Asia's borrowers endure a multi-year slump in commodity and shipping prices. China's slowest economic growth in a quarter century, the lowest shipping rates in three decades and a decline in crude prices have pushed some energy and coal companies into default.

Loan trading volumes are at the thinnest in a decade even with discounts near 20 per cent for borrowers including Singapore-listed Noble and Mercator Lines Singapore Ltd, SC Lowy, a Hong Kong-based fixed-income trading firm, said last month. South-east Asia's syndicated loan volumes slumped 39 per cent to a five-year low in 2015, according to Bloomberg data.

Noble Group's credit lines were trading at a "very high" yield on the secondary market, with its unsecured facilities due in May being offered in the 80s, SC Lowy said last month. Still, they have seen very little trading as both offers and bids remained wide apart, according to SC Lowy.

"We think prices could fall quickly from here," Trench Capital Partners' Southey said. "The revolving credit facility was being indicated at 83-88 two weeks ago, now a print in the 70's shows there is very little appetite to support pricing."


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