Noble Group Routed Again as Worst-Case Outcomes Get Scrutiny

  • ‘Hard to see the light at the end of the tunnel,’ IG Asia says
  • Macquarie’s Werner halves price target to 70 Singapore cents

Noble Group Ltd. shares extended a spectacular collapse and the company’s bonds fell amid concern that the embattled commodity trader will struggle to turn around its business, with analysts highlighting the critical importance of creditor support as they examine potential worst-case scenarios.

The company might have to restructure if operations don’t turn the corner and a white knight doesn’t step in within about six months, Harsh Agarwal, an analyst at Deutsche Bank AG, said in a note, while seeing the bonds as a “buy” after their decline. Although Noble Group isn’t close to liquidation, recovery rates are in line or higher than current prices, he wrote in the May 12 note.

Noble Group declined to comment on Monday, according to media adviser Bell Pottinger LLP. On Sunday, the company’s new chairman, Paul Brough, said his main priority at the moment is pressing on with a review. “All I’m concerned with is conducting the strategic review,” he said by phone.

The trader is facing mounting difficulties after reporting a quarterly loss of almost $130 million, and saying it won’t return to profitability until at least 2018-2019. It’s the latest in a string of setbacks for Noble Group, which has been selling assets and cutting costs to bolster its finances after years marked by credit-rating downgrades and a share-price collapse. S&P Global Ratings said last week the debt-load is unsustainable given its current earnings path.

Doing Business

“Many people have asked whether the fall is going to last, or is it still a viable entity going forward,” said Nicholas Teo, a trading strategist at KGI Securities Pte in Singapore. Creditors need to assess whether Hong Kong-based Noble Group is “still an entity that one should be dealing with as a counterparty either for trading, for borrowing, for just doing business with,” he said.

The former blue-chip stock tumbled 11 percent to end at 59 Singapore cents, the lowest since 2002, after sinking to as low as 57 cents in intraday trade. The slide follows a 48 percent nosedive last week that was accompanied by a plunge in the company’s bonds. On Monday, Noble Group’s 2020 bonds fell 1.2 cents on the dollar to 52 cents.

‘Quasi-Straitjacket’

“Access to both short-term and long-term debt financing are key for any commodity-trading business model,” Macquarie Group Ltd. analyst Conrad Werner said in a note, halving his share-price target to 70 cents amid expectations for a full-year loss in 2017. “And while Noble’s liquidity headroom did tick up slightly in the first quarter, it remains low in both a historical context and relative to short-term debt, acting as a quasi-straitjacket for Noble’s ability to pursue volume growth.”

Noble Group is trying to press forward on at least two fronts. Chief Financial Officer Paul Jackaman said last week the company is in talks with lenders over renewing a secured borrowing facility that’s been extended to the end of June.

Jackaman also said discussions with a potential strategic investor are still ongoing, without naming the party, which people familiar with the talks had identified as China’s state-owned Sinochem Group. Chairman Brough -- who replaced founder Richard Elman -- has been placed in charge of reviewing strategic alternatives.

‘Reasonable Compensation’

For some, the slump in the bonds offered a potential opportunity. MUFG Securities Asia moved its view on the notes to neutral from negative as the pricing now offers “reasonable compensation for risks,” according to a note on Monday. “Any progress on refinancing bank lines, selling further assets, or progress on attractive strategic investment would be welcome,” it said.

Deutsche Bank was also positive on the bonds, while acknowledging the company’s negative cash flows made the situation tighter than the bank had expected. The bank expects the secured borrowing facility will be extended, and the new chairman “will set out to run Noble as a going concern,” it said.

“We understand that the weak operations and tight liquidity perhaps also reduce an immediate need to step in, from a strategic investor’s perspective,” Agarwal wrote. “We are obviously not close to a liquidation, but even in a worst-case scenario, a simplistic analysis suggests recovery being in line/higher than the current trading levels,” he said, referring to the straight bonds maturing in 2018, 2020 and 2022.

Moody’s Investors Service downgraded its rating on Noble on Monday to Caa1 from B2 and said the outlook remained negative.

"The downgrade reflects heightened concern over Noble’s liquidity stemming from its weak operating cash flow and large debt maturities over the next 12 months," Gloria Tsuen, a Moody’s vice president and analyst, said in a statement. The first-quarter loss suggests “significant uncertainties” over its turnaround plan, she said.

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