Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If you owe the bank $100, that's your problem, according to a maxim attributed to famed old commodities player John Paul Getty -- but if you owe $100 million, that's the bank's problem.

That's a rare bit of good news for Noble Group Ltd., whose shares and bonds have been plunging after S&P Global Ratings warned the company may default on its debt within a year. Noble's rotten business model may lead to its demise in the long term -- but in the short term, its lenders have more to gain from forgiveness than rigidity.

"The company's capital structure is not sustainable," S&P analysts led by Danny Huang wrote Monday, adding that there's a "risk of nonpayment of its debt obligations due to weakened access to funding."

Sinking Ship
Debt and equity investors are fleeing Noble Group
Source: Bloomberg

Credit and equity markets agree. The shares Tuesday slid as much as 32 percent, hitting their lowest level since 2001, before being suspended. Yields on Noble's 6.75 percent bonds due in 2020 surged to about 48 percent as the price on the securities dropped to 42 cents on the dollar, while its 8.75 percent 2022 debentures issued in March are commanding 35 percent.

That sounds bad until you consider: A 48 percent yield looks pretty attractive, unless there's zero possibility of recovering your principal.

The odds of such a positive outcome aren't as bad as they might appear. For all Noble's travails, its liquidity looks about as strong now as it's ever been.

Look on the Bright Side
Noble's liquidity is looking stronger than it has for many years
Source: Bloomberg

The cash ratio and quick ratio (measuring its ability to fund short-term liabilities out of cash and cash plus receivables, respectively) are still short of 1, but that's normal for a commodities trader that holds a large volume of easily marketed inventory. The better guide is the current ratio, which at 1.9 is higher than it's been at any point over the past 10 years.

Noble has some major debts coming due over the next 12 months, according to S&P: A $620 million borrowing-base facility used as trade finance that matures next month, $379 million in bonds coming due in March 2018, and $1.1 billion in revolving credit facilities that run out in May 2018. On the other hand, it also has $1.55 billion in cash and equivalents, $2.06 billion in receivables, and $1.77 billion in inventories. Liquidating those to meet loan repayments may be drastic, but it shows there's a narrow path to survivability.

Security Blanket
Commodity traders like long-term unsecured finance. Noble has more of it now
Source: Company reports

That's no endorsement of Noble's long-term health. Any new banking facilities are likely to come at higher interest rates than the existing ones, further weighing on a cost structure that's already out of control. Improving commodity prices may also pose a problem: Higher prices raise the cost of funding a cargo, pushing Noble harder against the limits of its borrowings. A company's viability is under threat unless it can generate positive operating cash flows, and that objective has mostly eluded Noble in recent years.

The Incredible Shrinking Trader
Noble's net income has been falling. If only its costs had been doing the same
Source: Bloomberg
Note: December 2015 operating income figure not included for scaling reasons. The result was a $1.81 billion loss.

Still, commodity traders are famous for their ability to run on little more than a contacts book and an internet connection. While there are assets left to match Noble's pile of liabilities, its lenders have little to gain from pushing it into default.

The banks may be keeping this trader on life support -- but that doesn't mean they're about to pull the plug.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net