Noble Group Cut to Junk by S&P Sending Bond Yields to Record

  • S&P places commodity trader on watch for further rating cut
  • Shares slumped to 2008 low on Thursday amid commodity rout

Noble Group Ltd.’s credit rating was cut to junk by Standard & Poor’s, adding fresh challenges for the commodities trading house already facing a rout in raw materials, turmoil in Chinese markets and attacks on the firm’s accounting methods.

S&P lowered Noble Group’s rating to BB+ from BBB- and placed it on watch for further possible downgrade, the ratings company said in a statement on Thursday, following a similar move by Moody’s Investors Service in late December. Noble’s dollar bonds due in 2020 dropped to a record low of 54.78 cents on the dollar, according to prices compiled by Bloomberg.

The downgrades will test Chief Executive Officer Yusuf Alireza’s ability to restore investor confidence, with the company’s shares falling 9.2 percent in Singapore on Thursday to the lowest since 2008. He also needs to allay any concerns that could curb Noble Group’s access to short-term credit from other commodity houses, necessary for its trading operations.

Noble Group was the worst performer on Singapore’s STI index last year

Noble Group 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.

"I’m not surprised S&P downgraded them and the bond market wasn’t surprised either considering the price on their notes," said Andy DeVries, an analyst at Creditsights Inc. in New York. "What was surprising was that Noble said their collateral requirements after the downgrade weren’t as big as expected."

Cofco Sale

Noble Group has made efforts to buoy its creditworthiness. It agreed in December to sell the last of its agricultural unit to Cofco Corp., China’s top food company, for at least $750 million to reduce debt. Cofco already owned the other 51 percent of Noble Agri, bought for $1.5 billion in 2014.

However, S&P said liquidity, or short-term financing, was no longer strong enough to sustain Noble Group’s investment-grade credit rating. The outlook for the commodity trader’s “capital raising could be complicated by depressed" raw-materials markets, it said.

Noble Group must renew a $2.3 billion facility in May that helps fund its trading operations, although the collapse in commodity prices helps to reduce its credit requirements. Yields on the firm’s 6.75 percent bonds due in January 2020 widened to a record 25.2 percent.

Worst Performer

"In our view, the company’s credit standing in the capital markets and with lenders has weakened, reflected in its depressed securities prices," S&P credit analyst Cindy Huang said in a statement.

Noble Group 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.

Iceberg, a previously unknown group, has said Noble Group uses aggressive interpretations of accounting rules to inflate the value of its assets and contracts. Noble Group has repeatedly denied the allegations and in August, the trading house published a report by PricewaterhouseCoopers LLP saying its accounting complied with international rules.

Earnings Visibility

While S&P warned that visibility on Noble Group’s earnings and cash flow was "limited" because of a prolonged commodities downturn, Fitch Ratings said Thursday the trader has ample liquidity to meet rising collateral needs. Fitch rates Noble at investment grade.

"These collateral calls would come from their trading counterparties and I doubt any of them, which have been watching the company, wouldn’t have already required additional collateral," DeVries said.

While the collapse in prices for raw materials ranging from coal and iron ore to zinc has strained some parts of Noble Group’s business, the rout has also created opportunities. Noble’s oil trading business has profited by storing crude and selling it forward at higher future prices. The slump in prices to about $34 a barrel has also reduced the company’s financing requirements as has a decision to scale back its metal trading operations.

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