Noble Group's Net Debt Balloons as Constraints Hurt Trading

Updated on
  • Trader’s credit lines under ‘extreme pressure’ after losses
  • Covenant waiver gives company two months to restore confidence

Carson Block Says 'Wheels Falling Off' Noble Group

Noble Group Ltd.’s net debt surged by almost $1 billion over the first six months as trading losses and constrained access to funds heaped further pressure on the commodity trader as it battles for survival.

Net debt expanded $945 million from the start of the year to $3.82 billion at the end of June, the Hong Kong-based company said in a statement on Thursday as it reported a $1.75 billion loss for the second quarter.

More than two years into a crisis punctuated by accounting criticisms, a collapse in its securities and concern it may default, Noble Group has been selling assets, reshuffling its senior management team and seeking an investor. The loss was flagged last month, when the company also announced that it would retreat to its Asian roots by selling its gas and power unit and looking for buyers for its oil liquids business.

“Debt grew and it looks like they burned cash yet again,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “The market is looking for major positives from the results and I do not see any.”

Noble’s bonds fell on the back of the negative cash flows. Its bonds due in 2020 dropped 2.7 percent to 38.8 cents on the dollar after the results, which were reported after equity markets closed in Singapore. The company, which was founded by Chairman-Emeritus Richard Elman, has lost more than 90 percent of its market value since 2015.

Noble said that banks withdrew credit lines after a shock first-quarter loss, hurting its ability to trade during the second quarter. Short-term credit is critical for traders, which use it to fund commodity shipments.

The company’s committed and uncommitted bank facilities fell by more than half over the quarter to $4.6 billion, it said. It blamed the "constrained liquidity environment" for a drop of almost 20 percent year-on-year in oil trading volumes.

Credit Pressure

Credit lines from banks came under “extreme pressure,” Chief Financial Officer Paul Jackaman told investors. “That has caused significant issues,” he added.

Noble now has two months to restore confidence among its banks, counterparties and investors. It said it had secured a covenant waiver until Oct. 20 from lenders on its revolving credit facility due May 2018, matching the maturity of another key credit facility that was extended in June.

Paul Brough, who succeeded Elman, said the company had received support from Mercuria Energy Group Ltd. as well as three core banks -- Societe Generale SA, ING Groep NV and DBS Group Holdings Ltd. -- to help access financing for its Asian business. “We’re now exploring additional capacities with Mercuria which we hope can come onstream in the course of the next few weeks,” he said. “If that does happen, I’m confident we’ll have sufficient trade finance facilities to run our business here.”

The company last month announced a deal to sell its gas and power business to Mercuria, and has received interest from rivals to buy some or all of its oil unit. The bulk of the losses in the second quarter stemmed from writedowns on the value of long-term contracts.

Trading Losses

It was also hit by trading losses in oil and coal, reporting a $267 million net operating loss from supply chains. The company reported a 72 percent increase in selling, administrative and operating expenses compared with the first quarter of the year, which Jackaman attributed to “one-off payments around retentions and keeping the business stable”.

The valuation of the long-term contracts has come under particular scrutiny from Noble Group’s critics, including Iceberg Research, a long-time foe that’s said they were inflated. Over the years, the company has defended its accounting, and said the researcher, which doesn’t disclose the identity of its staff, is run by a disgruntled ex-employee.

Brough is heading up a strategic review. In the July profit warning, the company said the board concluded that as part of the review “a more conservative balance sheet valuation should be implemented.” It added that more writedowns may be in store, saying: “Further additional non-cash valuation adjustments may be recorded.”

— With assistance by Denise Wee

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