Battle-hardened Noble investors shrug off downgrades

Even as Moody's and S&P again cut the ailing commodities trader's ratings, speculation creditors will throw it a lifeline, propping up bond prices.

Noble Group's US-denominated bonds remained largely unchanged on Tuesday after ratings agencies Moody's and S&P again cut their ratings on the troubled commodities trader deeper into junk territory.

Thick-skinned bond investors, who've stuck with the struggling company despite a string of negative news, seem content to stay on in the belief that Noble's $2 billion line of credit, which is due to expire in October, may be extended.

The group's outstanding 2018, 2020 and 2022 notes rallied in the past two weeks, even though the group in late July issued a profit warning, pointing to a loss of as much as $1.8 billion for the second quarter. The January 2020 bonds were up to 40 cents on the dollar during trading on Tuesday morning, from a July low of 33, according to market data. 

According to Moody's, the group's cash and unutilised credit line dropped to $1.4 billion in June from $1.7 billion in March – not nearly enough to cover the $2.6 billion worth of debt due in the next 12 months.

In mid-June, Noble said its lenders had agreed to push back the repayment deadline on the $2 billion credit line by four months to October, and it was also in talks with banks over a revolving credit facility due in May 2018.

“The move up in price could be that some investors might surmise that the October 2017 deadline will be extended,” said Todd Schubert, head of fixed income research at Bank of Singapore, the private banking unit of OCBC. “The general consensus (and my own) is that there will be some sort of debt restructuring, although in what form and how severe it is, is currently unclear.”

Noble's bond holders likely face a haircut, or reduction in their principal holdings, of 40% to 50%, according to an August 13 note from Andy DeVries, an analyst at Creditsights. Alternatively, they may have to exchange their unsecured debt for lower-value, secured notes, he wrote.

"Terms and timing of such as move will be the main driver of near-term bond prices," he added.

Credit downgrade

The downgrades, announced on Monday night, came a week after the Singapore-listed company reported a quarterly loss of $1.75 billion for the three months to June, its steepest quarterly loss in a year and a half.

S&P said it had cut Noble's long-term corporate credit rating to "CCC-" from "CCC+", underscoring a heightened default risk – from substantial to imminent. "We believe Noble's cash on hand and the potential proceeds from the sale of Noble Americas Gas & Power will not be enough to cover the company's revolving credit facilities if Noble is not able to turnaround, or if it breaches its financial covenants and fails to obtain a waiver from banks," S&P's analysts wrote in the report.

Noble said it was working with advisors Morgan Stanley and Moelis & Co. to review different options amid the deepening crisis, including asset disposal and a stake sale to strategic investors.

Geneva-based Mercuria is buying Noble's North America gas and power business for $248 million. Noble is also looking to sell its oil-trading operations. The group rejected a buyout offer from Centricus, a London-based fund with close links to Japan's Softbank and wealthy investors in the Middle East, according to the Financial Times.

"The downgrade reflects significant default risk for Noble within the next several quarters, given its operating cash burn, declining cash levels and large debt maturities," said Gloria Tsuen, an analyst at Moody's, "Moreover, should it default, we believe the prospect of a full recovery of principal and interest will be low for unsecured bondholders." Moody's downgraded its rating on senior unsecured bond to "Caa3" from "Caa1".

In the past two years, Noble has been forced to reshuffle senior management, dispose of assets and trim costs to boost liquidity. The Hong Kong-based company has faced a series of credit downgrades, write-downs of its long-term commodities contracts and accusations of improper accounting treatments, all of which have pushed down its Singapore-listed shares by 95% since 2015.

The shares dropped as much as 4.7% at one point on Tuesday, before finishing flat at S$0.43. This year so far, the market value of the company is down 75%.

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