After first loss since 1998, Noble now faces debt test

An employee walks past a sign of Noble Resources, a Noble Group subsidiary, at the Singapore premises on Mar 6, 2015.
An employee walks past a sign of Noble Resources, a Noble Group subsidiary, at the Singapore premises on Mar 6, 2015. PHOTO: REUTERS

SINGAPORE/GENEVA (BLOOMBERG) - After Noble Group's first annual loss in almost two decades, the focus is now on whether the Singapore-listed commodity trader can sustain cash flows and persuade banks to keep lending the money it needs to fund operations.

The US$1.7 billion loss caps a turbulent year for Noble that saw its shares slump and debt rating cut to junk. The trader has been hammered by criticisms of its accounting and a commodities plunge that left it with US$1.9 billion in writedowns after revaluing coal contracts and selling its agricultural unit to Cofco Corp below its book value.

"From the earnings call, the company is well advanced in discussions with its bankers for extension of the revolver in May," said Charles Macgregor, Lucror Analytics Pte's head of Asian high-yield research in Singapore. "Their overall liquidity position appears sound," as the company shores up its position, he said by e-mail.

Noble's shares, the worst performer on the Straits Times Index last year after losing about two-thirds of their value, rose as much as 4.5 per cent in Singapore on Friday (Feb 26) and at 9:49 am were up 1.5 per cent at 34 Singapore cents.

Its 2020 notes gained for a second day, adding 0.4 cents to 54.3 cents on the dollar, according to Bloomberg-compiled prices, while its March 2018 notes added 0.9 cent to 54.7 cents. Still, both securities have dropped from more than 80 cents on the dollar as recently as in November.

The cost to protect the company's notes against non-payment for one year fell for a third day on Thursday in New York to 3,612 basis points, while the five-year contracts climbed 739 to 3,521 basis points, according to data provider CMA. Both levels indicate Noble is the riskiest company in Asia.

"They're still facing tough times," said Bernard Aw, a strategist at IG Asia Pte in Singapore. "There are concerns about banks lending to commodity producers. It will be even harder for not just Noble but other commodity companies to borrow money. They will have to pay higher refinancing costs, making it harder for them to return to profitability."

The collapse in Noble's securities and the surge in the cost of insuring its bonds against default highlights investors' concern over its financial health. The trader needs to renew a US$1.2 billion revolving credit facility that matures in May, which chief executive officer Yusuf Alireza said he plans to do "long before" the deadline.

"Our focus has been and will continue to be on cash generation and decreasing leverage," Mr Alireza said on a conference call after the Hong Kong-based company reported full-year results on Thursday. Noble has approved term sheets with a number of core banks on new funding arrangements, he said, without giving details.

While Mr Alireza didn't rule out the possibility of raising capital, he said the renewal of the revolving credit facility isn't dependent on such measures.

"The revolver will be executed and it is not in any way contingent on an equity transaction," Mr Alireza said. He wouldn't say how much interest Noble Group expects to pay on the renewal.

"It's going to be extremely difficult for them selling down assets in a market like this, and then meeting the refinancing at anything like acceptable margins," Robert Southey, managing partner at London-based Trench Capital Partners LLP, said by phone. "Losing the investment grade rating is a major blow to them."

The company had a record US$1.95 billion in cash at the end of the year and net cash flow from operations of US$651 million in the second half, after posting negative cash flow during the first half. It also cut its debt from the end of the third quarter by US$248 million to US$2.26 billion.

Mr Alireza said Noble's coal hedges had generated cash, offsetting the decline in prices and the impact on contract values. He also noted that the company's inventory levels remained stable, in response to speculation that Noble had only been able to boost cash flow by selling its stockpile of commodities.

Noble will fund its trading with a combination of financing secured against inventories as well as unsecured facilities. "Secured financing is much cheaper than financing we have done in the past so you have to look at the average cost of funding," Mr Alireza said.

The company said the plunge in coal prices is to blame for most of the US$1.2 billion in charges it booked on top of non-cash losses from the sale of its Noble Agri unit.

The value the trader attributes to long-term commodity contracts has come under particular scrutiny from its critics, including the anonymous Iceberg Research. The net fair value of these assets dropped to US$3.2 billion at the end of December, from US$4.1 billion at end-June. The fair value of the longest-term, or level 3, contracts fell by almost half to US$615 million, as Noble lowered its price assumptions.

The Bloomberg Commodity Index, a measure of 22 raw materials, has dropped by 26 per cent over the past year. Thermal coal prices tumbled to US$47.37 a ton in January, the lowest since November 2006.