News analysis

A bad year shaping up to be worse for Noble

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 (STI) 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 got 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 did not work: Profitable as it has been, the trend may not work in favour 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 benchmark STI.

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 this month. Even 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.

Noble, which spent much of last year fending off attacks on its accounting practices by a research firm and a short-seller, recently sold the rest of its agriculture unit to China's Cofco to address concerns about a liquidity crunch.

But even that US$750 million (S$1 billion) sale failed to impress. Its bond due in 2020 fell to a record low of less than 53 cents to the dollar yesterday. Among similarly priced bonds, Noble's has the highest one-year probability of default, Bloomberg calculates.

Chief exec Yusuf Alireza's view that losing the investment-grade rating would not push Noble over the brink may be right - if counter- parties do not ask it to post much more collateral to cover its trades. How much more is too much?  

S&P says Noble'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 firm says.

Those wanting to defend against non-payment over the next five years would have to pay almost US$3 million right away for credit-default protection on every US$10 million of Noble's debt. Lend that sum to another Asian commodities trader, Mitsui, and you are betting on debt regarded as so safe the CDS counter party has to pay you money, to the tune of about US$29,000.

As Bloomberg reported yesterday, Noble is now the riskiest firm in Asia for bond holders to hedge against non-payment of debt. And 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, the year ahead is going to be quite a tightrope walk.

For Noble's investors, last year's ugly duckling is unlikely to be this year's handsome swan.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 09, 2016, with the headline 'News analysis A bad year shaping up to be worse for Noble'. Print Edition | Subscribe