Poorer debt outlook adds to Noble's woes
Moody's analyst says downgrade is due to commodities group's higher leverage and lower interest coverage
Singapore
CONCERN is rising over Noble Group's liquidity position and strategic options going forward, as the impact of its woes spreads from its shares to its bonds.
This comes as credit rating agency Moody's on Wednesday downgraded its outlook for the trading house's debt on Wednesday. It warned that Noble's current Baa3 rating - the lowest investment grade score - could be lowered if it does not improve its liquidity position over the next two quarters, or if its gearing level continues to rise.
Yields for Noble's bonds have shot up in recent weeks, after another rating agency Standard & Poor's in early June cut its outlook on Noble's credit rating to "negative" from "stable, and added that it could downgrade Noble's credit rating to junk status without greater transparency.
A credit rating downgrade would result in higher borrowing costs for Noble, which like many commodity traders borrow heavily to fund large purchases.
"The entirety of the firm's yield curve has widened in the last 12 months," said research analyst Simon Colvin at financial information services provider Markit. "This increased bearish sentiment towards Noble's bonds could limit the firm's strategic options going forward as both the equity and debt portion of its balance sheet have come under pressure."
Yield spreads for Noble's bonds due January 2020 have widened to 626.4 basis points over five-year Treasuries. Olam's bonds due February 2020, in comparison, have a yield spread of 268 basis points.
Noble's credit default swap (CDS) spread - or the cost to protect its bondholders against non-payment - has also trebled in the last 12 months. The latest five-year CDS spread stands at 714 basis points - the highest in six years, Mr Colvin said.
Moody's analyst Joe Morrison said the downgrade in Noble's credit outlook was due to its higher leverage and lower interest coverage.
Noble had on Monday revealed an increase of US$1.4 billion in working capital in the first half of this year - in spite of falling commodity prices - as some suppliers lowered their credit to the trading house pending the results of a review by PricewaterhouseCoopers. Noble's CEO Yusuf Alireza said then that he expected the situation to normalise in the second half of the year.
Mr Morrison wrote in a note on Wednesday: "While Noble reported US$1.1 billion in available cash and US$1.8 billion in available committed bank facilities at 30 June 2015, these two resources alone are insufficient to meet the US$3.5 billion in debt scheduled to mature over the next 12 months or the potential capital call of US$500 million for associate X2 Resources Partners LP Inc."
While the liquidity risks are partially mitigated by the large amount of readily marketable inventory, he also noted that the firm's underlying commodity markets are "inherently volatile" and its business "confidence sensitive". The ratings outlook could revert to stable if liquidity improves in the form of available cash, retained cash flow over net debt, and adjusted net debt over Ebitda, Mr Morrison said.
Moody's decision could place more pressure on Noble, as one or more of its banks may be required by their risk management units to reduce borrowing limits, Charles Macgregor, head of Asia at Singapore-based independent credit research provider Lucror Analytics, was quoted as saying by Bloomberg.
Noble's shares slid 0.5 cent, or 0.99 per cent, to 50 Singapore cents on Thursday, its fourth consecutive trading session to end in the red.
