Noble Group Bonds at 53 Cents Push Debt to Distressed Grade

  • Debt now in the same league as Venezuela and Toys `R' Us
  • Company's one-year CDS more expensive than five-year

Bond investors are indicating they expect Noble Group Ltd.’s troubles to get worse as a selloff in its notes sent them into distressed territory.

The commodity trader’s dollar bonds due in 2020, its most liquid, rose 1.4 cents on the dollar to 55.2. They dropped below 53 earlier to their lowest on record, implying a yield of about 26 percent for the company’s debt. That puts it on par with issuers such as the Republic of Venezuela and U.S. retailer Toys “R” Us Inc., which rating firms have indicated are likely to miss debt payments in the short term. Noble Group has also become the riskiest company in Asia to hedge against nonpayment of debt based on credit-default swaps contracts.

Standard & Poor’s lowered Noble Group’s credit score to speculative grade territory on Thursday, following a similar move by Moody’s Investors Service in late December. The rating cuts will test Chief Executive Officer Yusuf Alireza’s ability to bolster investor confidence, at a time when he also needs to ensure the Singapore-listed firm maintains access to short-term credit from other commodity houses, necessary for its trading operations.

“The average rating of Noble is now junk, and this forces many investors who can only hold investment grade out of those bonds,” said Frankfurt-based Sergey Dergachev, a senior money manager who helps oversee $13 billion at Union Investment and sold his position on the company last year. “Some financing lines for Noble may require investment-grade ratings, so there is a risk that losing that status also means difficulties in obtaining liquidity, and that is precarious for Noble.”

Noble has two notes in Bank of America Merrill Lynch’s Asian Corporate Investment-Grade bond index, with a total weight of 0.24 percent. It has a 0.22 percent weightage in the Asian high-grade credit index compiled by JPMorgan Chase & Co.

S&P cut Noble Group’s rating to BB+ from BBB- and placed it on watch for a further possible downgrade. Both it and Moody’s cited liquidity as one of the issues that prompted the move. S&P also said that “the outlook for the company’s capital raising could be complicated by depressed commodity markets.” Noble Group’s shares fell as much as 10 percent in Singapore on Friday to the lowest since 2008.

A Noble Group external press representative at Bell Pottinger LLP referred to a statement issued on Thursday and said in an e-mail that the company declines further comments.

Collateral Calls

The company said an increase in collateral calls, or demands that it set aside more cash to guarantee trades after the credit rating downgrades, was still below the $100 million to $200 million range that Alireza estimated in comments to analysts last year. The firm also doesn’t expect S&P’s action “to have a material impact” on operations, it said in a statement Thursday.

“These collateral calls would come from their trading counterparties and I doubt anyone who has been watching the company wouldn’t have already required additional collateral,” said Andy DeVries, an analyst at Creditsights Inc. in New York. He said that high credit-default swap costs may also imply a lack of confidence in the company’s future. “Since it’s hard to short the bonds, some counterparties could be buying CDS to protect their exposure to the company,” DeVries said.

Credit-default swaps tied to Noble Group have surged in the past month to the highest among Asian corporates, according to data provider CMA. The five-year contracts cost 1,596 basis points, implying a 75.6 percent probability of default in five years. That means it costs about $1.6 million annually to insure $10 million of debt. The one-year swaps are costlier, at just under $2 million.

“Having an inverted CDS curve is a very worrying signal, it means the market prices a risk of distress in near-term much higher than over a five-year horizon,” Dergachev said. “And under current difficult circumstances, with commodity prices severely down, pressure on China growth plus internal challenges within Noble, the mix is really unfavorable for the company at the moment.”

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