Noble Group's View It Can Handle Junk Rating Is Put to Test

  • Shares at 7-year low as S&P follows Moody's in downgrade
  • Investors focus on collateral requirements amid market rout

Noble Group Ltd.’s view that it can operate with a junk rating is about to be stress-tested, after Standard & Poor’s became the second agency to downgrade the company’s debt.

Shares in the Hong Kong-based commodity trader, already at seven-year lows, lost as much as 11.6 percent in Singapore on Friday after S&P’s action. It follows a similar move by Moody’s Investors Service last month, piling on the pressure as Noble seeks to navigate a rout in raw materials prices, turmoil in Chinese markets and attacks on the firm’s accounting methods.

Chief Executive Officer Yusuf Alireza will need to shore up investor confidence and allay concerns that could curb its access to short-term credit necessary for its trading operations. Noble said Thursday an increase in calls for collateral, or demands it set aside more cash to guarantee trades after the downgrades, was still below the $100 million to $200 million range that Alireza had estimated in comments to analysts last year. The firm doesn’t expect S&P’s action to have a material impact on operations.

“Judging from the negative outlook for commodities, which might prompt higher collateral requirements, investors are understandably not optimistic about the stock,” Bernard Aw, a strategist at IG Asia Pte in Singapore, said by e-mail. “If lenders start to raise their margin/collateral requirements, then we could see Noble’s liquidity position straining further.”

Riskiest Company

Shares of Noble finished 1.5 percent lower at 34 Singapore cents. It’s also become the riskiest company in Asia to hedge against nonpayment of debt based on credit-default swaps contracts.

Its dollar bonds due in 2020, its most liquid, rose 3.3 cents on the dollar to 58.6. They dropped below 53 earlier on Friday to their lowest on record, implying a yield of about 26 percent for the company’s debt. That put 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’s efforts to buoy its creditworthiness and reduce debt include the sale in December of its agricultural unit to Cofco Corp., China’s top food company, for at least $750 million. Cofco already owned 51 percent of Noble Agri, bought for $1.5 billion in 2014.

Disappointing Downgrade

“The credit-rating downgrade is disappointing in light of the company’s efforts to keep its investment-grade rating with the sale of its remaining 49 percent stake in Noble Agri to Cofco,” Gerald Wong, an analyst at Credit Suisse Group AG, wrote in a note to clients on Friday. The bank reduced its share-price forecast for Noble by 20 percent to 40 Singapore cents, citing growing concerns on its liquidity.

S&P said liquidity, or short-term financing, was no longer strong enough to sustain Noble’s investment-grade credit rating. The outlook for the commodity trader’s “capital raising could be complicated by depressed” raw-materials markets, it said. The third major agency, Fitch Ratings, has Noble at investment grade and said Thursday the trader has ample liquidity to meet rising collateral needs.

Commodity Slump

“The sale of Noble Agri has certainly improved the financial position of Noble Group, but whether it will remain sufficient to cover its liquidity requirements will depend on how the global commodity sector performs over the next few quarters,” IG’s Aw said.

The Bloomberg World Mining Index has fallen 6.5 percent this year as investors shun metals amid worsening economic conditions in China, the world’s biggest consumer. Oil prices, meanwhile, have hit a 12-year low because of a global glut.

Noble shares lost almost two-thirds of their value in 2015, making it the worst performer on Singapore’s benchmark Straits Times index, after a year of attacks on its accounts by critics including the anonymous Iceberg Research and short-seller Muddy Waters LLC. The company has rejected the various allegations.

“If Noble manages to weather the liquidity issues in the next 12 months, the company should be fine, but with a smaller balance sheet like in the days before it was upgraded to investment grade,” said Soren Bertelsen, a money manager in Copenhagen at BI Asset Management, which oversees $1 billion of emerging-market corporate bonds.

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