Noble Default Risk Rises Most in Asia on Debt Payment Challenge

  • Protection against non-payment costs hit 26 percentage points
  • Commodity trader has $2.1 billion in loans falling due by May

Singapore-listed commodity trader Noble Group Ltd.’s default risk rose the most in Asia this year as a deepening resources slump threatens to worsen the imbalance between the company’s cash flows and liabilities.

The cost to protect the company’s notes against non-payment for one year is 2,593 basis points, the highest in Asia, according to data provider CMA. The company is preparing to refinance $2.1 billion of loans due in April and May. Noble reported short-term debt of $3 billion on Sept. 30 and $1.9 billion of unused committed bank facilities plus cash and equivalents.

The climb in credit-default swaps came after Standard & Poor’s and Moody’s Investors Service both cut Noble’s rating to junk in the past month citing liquidity issues, while Fitch Ratings affirmed its score at the lowest investment-grade ranking on Thursday as asset sales improved finances. Noble said it has been successful in raising cash and still has support from its creditors.

"They still have a liquidity issue that they’ve got to manage, which is dealing with the banks to refinance loans coming due in May at a time when the industry environment is not favorable," said Joe Morrison, an analyst at Moody’s in Hong Kong. "The rating committee felt that selling assets to deal with a liquidity issue was not consistent with an investment grade profile and that the company still has some challenges going forward."

Noble agreed in December to sell the remaining 49 percent of its agricultural unit to China’s Cofco Corp. for at least $750 million to reduce debt. Cofco already owned the other 51 percent.

“Banks have their own rating metrics, and none of our bank facilities have ratings triggers," Stephen Brown, a Noble spokesman, said in e-mailed comments. "We have successfully raised $2.1 billion since last October. More than half of that capital is from the banks, which is a demonstration of strong support from the lenders that we still continue to enjoy. In addition, with the fall of commodity prices, working capital requirements -- and hence funding needs -- have decreased.”

The following charts show the rise in Noble’s bond risk, deteriorating finances and the slump in commodities:

CHART 1: Noble’s one-year CDS rose 602 basis points this year while the five-year contract rose 535, the most in Asia.

CHART 2:  Noble faces a maturity wall this year which is almost three times the amount they held in cash on Sept. 30, data compiled by Bloomberg show. Chairman Richard Elman bought 20 million shares this week in the commodity trading company he founded to restore confidence after the shares sank to the lowest since 2008.

"Noble’s stretched gearing and cash flows have been exacerbated by the rapidly deteriorating commodities price outlook," said Kuala Lumpur-based Ray Choy, head of fixed income and currency research at RHB Research Institute. "The default probability has risen now that the commodity cycle could have turned secularly worse."

CHART 3: The London Metal Exchange Metals Index has dropped 12 percent since the company’s latest earnings period ended and the Bloomberg World Mining Index 17.5 percent. In a results call with investors on Nov. 12, Chief Executive Officer said that net profit was dragged down by a $69 million operational loss on its metals and mining business. 

"It’s inherently a thin-margin business," Moody’s Morrison said. "When you’ve got a deteriorating industry environment and liquidity declining and you’ve got thin margins and you’ve got negative free cashflow from your core operation, there’s going to be pressure on the ratings."

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