LONDON (BLOOMBERG) - Singapore-listed Noble Group's sale of its oil business to Vitol Group probably buys the embattled commodity trader time. But even if it survives long enough to complete the deal, there is still a mighty struggle ahead: the near-inevitable restructuring of over US$3 billion (S$4.1 billion) in debt.
Analysts at BNP Paribas, Nomura Holdings, JPMorgan Chase & Co and iFast Corp all predicted after the sale was announced on Monday (Oct 23) that the Hong Kong-based company would be forced to restructure its debt.
"The next few months will be critical," said Jean-Francois Lambert, a consultant and former head of global commodity trade finance at HSBC Holdings. "The business whilst shrinking is still bleeding and this becomes very worrisome." Noble Group didn't respond to requests for comment.
The company's bonds rallied on Monday as it said the Vitol deal, coupled with the earlier sale of the gas and power business to Mercuria Energy Group, would provide sufficient proceeds to pay down two secured debt facilities. But attention is shifting to the ability of the rump company, focused on coal and iron ore trading in Asia, to service Noble's debt load.
Those prospects do not look especially good: as part of a warning on Monday that it may face up to US$1.25 billion in losses for the third quarter, Noble said its hard commodities business would make net losses of US$50 million to US$100 million in the third quarter - the third straight quarter in which the division has been a source of losses.
"Remaining unsecured debt has interest liabilities of above US$200 million, which is unlikely to be serviced from the remaining hard commodities business," Varun Ahuja at JPMorgan said in a note on Monday. "We think the restructuring of the remaining business post completion of the oil business is the base case."
He estimates what is left of Noble could make an annual operating profit of no more than US$200 million.
Exactly how much surplus cash Noble will have from the sale of the oil unit and gas and power business is far from clear. On Monday, it said that for "illustrative purposes", had the deals been done immediately after the end of June the company would have received US$1.42 billion in aggregate proceeds, and after repayment of US$836 million of debt would have been left with US$582 million in net proceeds.
Those numbers include proceeds from both the planned sale of the oil business, and also the completed sale of the gas and power business, a Noble spokesman confirmed by email. The gas and power sale proceeds are based on the consideration paid on closing, plus amounts placed in escrow and cash received by the business prior to the closing date, they said.
Noble received US$102 million in cash and a further US$83 million paid into an escrow account when it sold its gas and power business to Mercuria at the end of last month.
What's more, the value of the net working capital in the oil business - the basis for calculating how much Vitol will pay - is likely to have declined since June as the business was "adversely affected" by capital constraints during the period, according to Noble's statement.
In addition, the company made further impairments on oil deals that were excluded from the Vitol sale.
And not all of the proceeds of the oil sale would be paid immediately: according to the deal with Vitol, US$174 million would be paid into three separate escrow accounts. S&P Global Ratings said on Monday that "default risk remains" for Noble as the company's cash balance remains uncertain.
Noble Group has already started talks with lenders under its US$1.1 billion revolving credit facility, or RCF, due in May 2018, who have agreed to extend a covenant waiver that was due to expire last week until Dec 20. That is likely to be the first in a series of key deadlines the company must navigate.
In addition, the company has US$379 million in bonds due in March 2018, US$1.18 billion in bonds due in 2020 and US$750 million in bonds due in 2022, according to data complied by Bloomberg. It also has a US$400 million perpetual bond.
Any talks are likely to be complicated by the divergent interests of different sets of creditors.
Banks' exposure is largely through the secured facilities, Lambert said. "Bankers have been quite amenable, but part of the reason is probably that most of them are exposed to the North American borrowing bases which are likely to get repaid by the sales proceeds," he said.
As many banks have either sold their stake in the RCF or written it down, they are "now looking forward to 2018 with none or little exposure", Lambert said, suggesting they may be less pliant.
Ultimately, even if Noble's recently appointed chairman, restructuring expert Paul Brough, can close the deal with Vitol and reach a deal with Noble's creditors, the company still needs to turn around the performance of its core trading business to survive.
"The company will need to demonstrate in the fourth quarter that the bleeding is over, reassure its key staff and convince everybody that they have a realistic game plan for the future," said Lambert. "Not an easy task."