Noble Group Debt Back Above 60 Cents as Commodity Distress Easesby
Bonds rally to 60.3 cents after sinking to 41 cents in January
Credit fundamentals `still warrant some caution,' says RHB
Noble Group Ltd.’s plans to refinance loans due next month are getting a boost as the commodities collapse eases.
Bonds due 2018 from the resources trading company, which has been cut to junk and will be removed from Singapore’s Straits Times Index, recovered to 60.3 cents on the dollar Tuesday from as low as 41 cents on Jan. 22, a period in which its shares surged 60 percent. Noble Group is also the top-performer from Southeast Asia in a Bank of America Merrill Lynch Asian high yield index, as commodity prices climb about 9 percent from a January low.
Chief Executive Officer Yusuf Alireza is under pressure to seal the refinancing of loan facilities before they expire from mid-April through the end of this year. Discussions with banks about extending a revolving facility are “well advanced,” he said on Feb. 25, as the company posted its first annual loss since 1998. Noble Group had $2.1 billion of bank debt due for repayment by the end of 2016 as of Dec. 31, according to that financial report.
“The upturn in Noble’s bond prices is largely due to the recovery in commodity prices,” said Ray Choy, regional head of fixed income and currency research in Kuala Lumpur at RHB Research Institute. “While refinancing could occur due to good access to capital markets, the credit fundamentals of Noble still warrant some caution.”
The company is now focused on generating cash and reducing its leverage, Alireza said on the Feb. 25 earnings call. It’s also agreed term sheets with a number of core banks on new funding arrangements, he added. Noble Group declined to comment beyond those statements, said a spokeswoman at its external press adviser Bell Pottinger Plc.
Investors who bought the company’s 2018 notes at their January low would have earned 44 percent following their price surge, according to Bloomberg-compiled prices. Its 2020 bonds have rallied to 58.3 cents from 40.2 cents on Jan. 21, handing buyers a 43 percent return. The shares have soared since then as oil passes $37 a barrel and iron ore approaches a nine-month high.
It was only last July that Noble Group’s dollar-based debentures traded above par, or 100 cents on the dollar. As the commodities rout deepened and the firm’s accounting methods came under scrutiny, the prices sunk below 70 cents in late 2015, a level typically associated with companies in financial distress. Some of its loans traded at about 75 cents on the dollar in January, people familiar with the matter said Feb. 2.
Moody’s Investors Service lowered its rating on Noble Group below investment grade on Dec. 29, while Standard & Poor’s moved it to junk status on Jan. 7. Fitch Ratings has kept Noble Group on the lowest investment grade.
The company’s Noble Americas unit met lenders in the U.S. on Monday to discuss up to $2.5 billion in credit facilities that will be used to refinance borrowings, according to people with knowledge of the matter. They include a $1.5 billion committed portion and a $1 billion slice that lenders can refuse the company to draw on, said the people who aren’t authorized to speak publicly.
The two loans will cost 1.7 percentage points and 1.6 percentage points more than the London interbank offered rate respectively, said the people. The prices will increase if Noble Group’s ratings are cut.
“Noble has made significant headway in reducing its adjusted net debt whilst maneuvering to turn cashflow positive,” said Dhiraj Bajaj, senior vice president at Lombard Odier (Singapore) Ltd. “They’ve moved from a growth strategy to one in which they have to consolidate towards their key strengths in the light of very difficult industry conditions.”
The rebound in Noble Group’s bonds rewarded credit analysts at Barclays Plc and Deutsche Bank AG who recommended the March 2018 notes last month amid reports the commodity trader was renewing its credit lines. The plan, if successful, will give the company time to generate cash flow and reduce debt, Barclays said.
Not everyone is swayed. Nomura Holdings Inc. said in a March 4 report it was staying “underweight” on Noble Group’s 2018 and 2020 notes, adding that “unless the company raises fresh capital, we expect its liquidity profile to continue to deteriorate.”
“There is a difference between the bond prices being supported and credit fundamentals remaining weak,” RHB’s Choy said. “There is a disconnect.”