Noble Group Ballooning Debt Seen Raising Restructuring Risk

  • Trader’s liquidity headroom fell to $1.4 billion at June 30
  • Barclays’ base case for Noble to conduct liability management

Margaret Yang, market analyst at CMC Markets Singapore, discusses Noble Groups surging debt and the outlook for the company. She speaks on 'Bloomberg Markets: Asia.' (Source: Bloomberg)

Noble Group Ltd.’s rising debt load is adding to speculation that it will need to restructure its obligations, even after the embattled commodity trader obtained a crucial covenant waiver that buys it more time.

“Noble’s current capital structure is not sustainable,” said Annisa Lee, head of Asia ex-Japan flow credit analysis at Nomura International (Hong Kong) Ltd. “It is still my base case that it will have to go for restructuring or liquidation eventually.”

The company is fighting for survival more than two years into a crisis punctuated by accounting criticisms and a collapse in its securities. It reported a $1.75 billion loss for the second quarter on Thursday and announced that it would retreat to its Asian roots by selling its gas and power unit. Noble Group, which was founded by Chairman-Emeritus Richard Elman, has lost more than 90 percent of its market value since 2015.

Liquidity headroom -- a metric that gauges the amount of capital available to fund its business -- slumped to $1.4 billion as at June 30, compared with $2.4 billion as of March 31 and $2 billion at the end of 2016.

JPMorgan Chase & Co. said that a key disappointment for the second quarter was on the cash flow, as the firm burnt over $500 million in operating cash flows.

Noble Group’s total debt stood at $4.6 billion at end-June, down from $4.8 billion at March 31, but still up from $4 billion at end 2016, according to the company’s exchange filing. Its net debt surged by $945 million from the start of the year to $3.82 billion at the end of June.

“Our base case remains that Noble will eventually conduct a liability-management exercise,” wrote Jit Ming Tan, analyst at Barclays Plc, adding that this will likely come in the form of a debt exchange or extension plan.

Noble Group said that banks withdrew credit lines after a shock first-quarter loss, hurting its ability to trade during the second quarter.

The company’s debt maturities peak in 2018, when it has to repay $379 million of a bond due in March, while a $1.1 billion revolving credit facility matures in May. Noble has drawn down about $1 billion on its borrowing base facilities, the company said in a call with analysts on Thursday.

‘Extreme Pressure’

“There is also no doubt that our bilateral trade line facilities came under extreme pressure in the quarter,” said Paul Jackaman, Noble’s chief financial officer at Noble on the call on Thursday. “That has caused us significant issues.”

Some holders of Noble Group’s dollar bonds have hired Houlihan Lokey as their financial adviser, people with knowledge of the matter said this week. The company’s bonds due 2020 rose 2.3 cents on the dollar to 40 cents as of 5:37 p.m. in Hong Kong, according to data compiled by Bloomberg.

Noble Group 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.

The Bloomberg Default risk model, which tracks metrics including share performance, liabilities and cash flow, shows a 12.42 percent probability that Noble will default on its debt in the next 12 months, up from 2.7 percent at the beginning of May before the commodity trader released its first-quarter profit warning. An external public relations firm representing Noble said the company declined to comment on the default risk.

“They are in a difficult spot,” said Abhishek Rawat, a director at China Merchants Securities Investment Management (HK) Co. “It doesn’t look like a great situation for bondholders.”

— With assistance by Lianting Tu, and David Yong

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