Noble Group Faces Liquidity Woes, Bonds Slump on Rating Fear

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Concern is mounting that shrinking liquidity at Noble Group Ltd. is edging Asia’s largest commodity trader closer to losing its investment-grade credit rating, as its bonds fall to the lowest in three years.

On Monday, Noble’s Chief Executive Officer Yusuf Alireza said the company’s seen some counterparties trim credit lines. While Alireza said he expects the situation to normalize later this year, on Wednesday Moody’s Investors Services cut its outlook on the firm’s Baa3 score to negative.

Noble’s 6.75 percent 2020 dollar bonds fell 1.2 cents on the dollar to 95.12 cents as of 5:55 p.m. in Hong Kong, the least since 2012, Bloomberg-compiled prices show. The notes dropped 2.2 cents on the dollar Wednesday, their biggest one-day decline in almost two weeks. BBB scored Asian securities tracked by a JPMorgan Chase & Co. index returned 0.03 percent in the week to Aug. 12, while BB rated bonds dipped 0.61 percent.

The move by Moody’s is adding to concern even after Noble spent half a year defending its accounting practices against critics led by Iceberg Research and short-seller Muddy Waters LLC. Noble’s position is further complicated by a rout in commodity prices, which has forced the company to expend more capital, reducing its liquidity.

“Liquidity is the lifeblood of a commodity trader,” said Charles Macgregor, a credit analyst at Lucror Analytics Pte in Singapore. Moody’s decision “will now place more pressure on Noble’s banking group. We would expect that one or more of the banks may be required by their risk management units to reduce limits.”

Credit Risk

Noble’s stock fell 1 percent to S$0.50 Thursday after a 11.4 percent drop Wednesday. Credit default swaps insuring the company’s debt against nonpayment jumped 13 basis points Wednesday to 664.3 basis points, the highest since May 2009, during the global financial crisis.

Noble Group last month hired PricewaterhouseCoopers LLP to conduct a third-party review of its accounting, seeking to put the criticism against it to rest. PwC’s report, posted on Monday, confirmed that Noble complied with international accounting standards while recommending the firm improves its governance and methodology used to value long-term contracts.

While the review was ongoing some counterparties chose to limit Noble’s credit, Alireza said. To compensate, Noble used letters of credit or cash and the company’s business wasn’t materially affected, he said.

“Certain counterparties have used the excuse of the PwC review to wait for that” to release credit lines, Alireza said during an earnings call in response to a question about whether counterparty credit issues would normalize in the second half.

Weaker Profile

“If we had a counterparty that historically gave us a $200 million credit line and they change it to $50 million, (they) have told us they’d review it after the PwC review,” Alireza said.

Moody’s noted Wednesday that Noble’s liquidity profile weakened in comparison with the last few years. The company has $1.1 billion in cash and $1.8 billion in committed bank lines, which is “insufficient” to meet the $3.5 billion in debt due to mature in the next 12 months and the potential commitment to invest $500 million in an associate X2 Resources Ltd., the ratings company said.

“Noble is an investment-grade company with a strong business and ample resources and options, but we want to monitor how they manage the liquidity profile at a time when leverage has risen and the industry environment isn’t particularly favorable,” Joe Morrison, a senior credit officer at Moody’s, said via e-mail.

Positive Feedback

Noble Group has already taken steps to reduce costs and release working capital, company spokesman Stephen Brown said by e-mail today. As for meeting short-term debt obligations, the company doesn’t expect there to be any refinancing risk and has “a number of financing options,” Brown said. He also said feedback from the company’s stakeholders on the PwC report has been “very positive.”

Standard & Poor’s also changed its outlook on Noble to negative on June 11, citing a weakening in its trading position and cash generation.

S&P didn’t see the need for further action on Noble Group following the publication of the company’s second-quarter results this week, it said Wednesday.

“We expect the company will moderate its working capital, control short-term debt and have sufficient committed bank lines and cash to maintain a strong liquidity position over the next six to 12 months,” S&P analyst Cindy Huang said in an e-mail.

Noble’s business is being the middleman moving raw materials from producers to consumers. In the process, it needs to manage risks associated with the supply and price of the materials in question, as well as the cost of moving them. All of this requires financing, the cost of which can determine how much profit Noble can make.

Since the publication of PwC’s review, Noble has “started the process of reaching out” to its key counterparties, Alireza said on Monday. “It’s a main priority for us.”

“Our clients and our counterparties that know us, that deal with us every day, that know what kind of organization that we run, know the professional service that we provide and know the professional people that they interact with have been supportive,” Alireza said.

Where there’s been pressure inside the credit departments of lenders, Noble has set up meetings to address any concerns and “hopefully go back to normal,” he said.

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