Noble Group, the embattled commodity trader, is working on its largest loan backed by inventories as banks demand more security, forcing a dramatic overhaul in the way it borrows.
The Hong Kong-based company is seeking US$2.5 billion (S$3.5 billion) in a so-called borrowing base facility guaranteed by oil, with the potential to increase the final size to US$3.25 billion if commodity prices rise over the next year.
The financing, already employed by most of Noble's competitors, signals that banks are still willing to support the junk-rated commodities trader, but they are tightening the leash by demanding guarantees. Also, the use of secure financing means existing bondholders and lenders may see themselves relegated in potential claims.
"This suggests that the company is moving in the right direction where they are looking to improve the credit situation," said analyst Nirgunan Tiruchelvam at Religare Capital Markets in Singapore. "The company has always maintained that the inventory that they carry on their books can be used for financing because it is equivalent to cash. If... they can raise this money, it is a step in the right direction and it will be a shot in the arm for the company."
Noble Group is among the few commodity traders - including larger competitors Glencore and Vitol Group - that still finance themselves via unsecured loans, without pledging collateral, instead relying on their creditworthiness.
The company has been under pressure from banks to shift its financing to secured financing, particularly after Standard & Poor's and Moody's Investors Service cut the company's debt rating last December.
The company has a US$450 million secured loan backed with oil stored in the United States. This secured loan was increased to US$1.1 billion last year.
The new one-year borrowing base facility refinances the existing borrowing base of US$1.1 billion and adds another so-called standby letter-of-credit facility also worth US$1.1 billion, sources said. Mitsubishi UFJ Financial Group is the lead arranger.
Noble declined to comment on its borrowing plans.
Noble, which started marketing the loans to other lenders in New York this week, is offering to pay a rate starting at 1.6 percentage points more than the London interbank offered rate, sources said.
The margin is the highest for any one-year loan Noble has raised since at least 2009 and double the 0.85 percentage point spread Noble paid last year for a smaller secured loan. At the same time, Noble is still seeking to refinance a US$1.2 billion revolving credit facility, according to people familiar with the talks. Its shares dropped as much as 8.9 per cent to 41 Singapore cents before trading at 43.5 cents at close yesterday.
Noble chief executive officer Yusuf Alireza needs to refinance loan facilities before they expire between mid-April and the end of this year. Discussions with banks are "well advanced", he said last month, as the company posted its first annual loss since 1998. The company's shares were hammered last year after its accounting practices, including how it values long-term contracts, were criticised by anonymous group Iceberg Research.
Mr Ray Choy, regional head of fixed income and currency research in Kuala Lumpur at RHB Research Institute, said that the recovery in commodity prices was the main factor behind the rally in Noble's bonds. "While refinancing could occur due to good access to capital markets, the credit fundamentals of Noble still warrant some caution," he said.
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