Is Noble heading for the iceberg?

The company's stock and bond prices staged a small recovery late last week. Was it just a dead cat bounce, or a sign the company can weather its liquidity crisis?

The embattled Noble Group saw its equity and bond prices stage a partial recovery late last week after being hit by a crescendo of negative announcements, which began with a profit warning on May 9 and has led all three international credit rating agencies to downgrade the company to distressed status.

Since Noble announced a $125 million first quarter net loss nearly a month ago, analysts and investors have been trying to unpick its opaque black box financials and understand whether it can survive with or without a white knight, or will need to be restructured or liquidated by its new chairman, Paul Brough.

The relief rally appears to have been prompted by hopes the Singapore-listed group can sign a new borrowing base facility, which may stave off a liquidity crunch.

The commodity trader's house banks, led by Mitsubishi UFJ Financial Group (MUFG), are now out in the market with a new $2 billion facility. If successful, this will not only transition a big chunk of the group's debt pile from unsecured to secured status, but also effectively refinance $588 million of a previous borrowing base facility, which falls due in June.

The group’s share price rose 9.04% last Thursday to close at S$0.42 and stayed flat on Friday. Year to date, however, it remains down 77.65%. 

Its most recent $750 million 8.75% 2022 bond issue also rose to 47.5 cents on the dollar on Friday from a low of 37 cents earlier in the week. It is now rated Caa1/CCC+/B- compared to B2/B+/BB+ when it was priced.

Its fall from grace has been shockingly quick, given the deal was priced at par only two-and-a-half months ago and prompted some difficult questions for investors, the company and the banks, which led it.

Iceberg’s view

But anonymous research firm Iceberg, which first first accused Noble of accounting irregularities two years ago, believes the market is focused on the wrong issue.

It says concerns surrounding banks' commitment to a new borrowing base facility are less important than how the group’s suppliers are acting, and believes a liquidity crunch is inevitable.

In emailed comments to FinanceAsia, it said: “The problem is not the banks, which can wait, but the suppliers (payables) who will never wait in this kind of situation. The liquidity crisis will come from them.”

It argues suppliers are likely to be aggressively cutting their exposure to Noble and flags that they will have first call on inventory proceeds ahead of bank creditors. The latter will also not only be aware of this fact but the complications of putting together a borrowing base facility backed by inventories, which could be subject to rapid change. 

Iceberg also elaborated: “Any large trader needs to maintain hundreds of millions of cash at any time otherwise payment delays from customers or margin calls can trigger a liquidity crisis.”

In a recent credit research report, JP Morgan also concluded there is a “risk of trade payables declining".

Noble itself says this is not the case. In emailed comments to FinanceAsia, it said: "We've restructured our flexible balance sheet since losing investment grade status and are not materially exposed to this, using letters of credit."

JP Morgan further estimated that $350 million of Noble’s cash is tied up with brokers and said the group’s woes were likely to be pushing this figure higher.

Again Noble says this is not the case. It says instances are isolated and "we just move exposures. So there's no cash outflow".

Net of its estimated brokers' payments, JP Morgan estimated the group has available cash of about $600 million following the repayment of a $650 million secured loan and $115 million in revolving credit facilities in May.

News of this repayment led many investors to conclude the group’s house banks were not willing to roll over or refinance its debt. When combined with its first quarter loss, the result was a massive loss of confidence.

Liquidity position

In the online roadshow for its bond deal in early March, the group said it had liquid assets of $3.548 billion. This broke down into $1.05 billion of readily available cash, $943 million from under-utilised commercial banking facilities and $1.5 billion from readily marketable inventories.

However, the cash component is now down to about $600 million according to analysts' estimates following the loan repayment. Analysts have been questioning how marketable the inventories really are as well.

Some believe that if banks are willing to renew the borrowing base facility they must have seen the trading book and be happy with the liquidity of its contracts.

However, Iceberg believes an unknown proportion of Noble’s contracts are illiquid and involve small mining companies, which have “been exploring for years, but not even financed their mines".

In its recent research report, JP Morgan credit analyst Varun Ahuja said: “Theoretically the company can liquidate some of its contracts but in the recent past, it has not been willing or able to do so.”

Ahuja goes on to say the company’s “inadequate disclosure” of its contracts “even in broad/competitive” terms makes it all but impossible to calculate their fair value and how much bond investors would get back in a recovery scenario. He estimates a range of 30 to 50 cents on the dollar and concludes the company will run out of cash in two quarters if it continues to burn it at the current rate.

Noble’s cash burn rate was one of the main negative surprises of its first quarter results and has been highlighted by all three ratings agencies in their recent releases. In 2016, the group reported net working capital outflows of $1.1 billion.

In its statement on May 22, Standard & Poor’s said the group was on course for a net negative liquidity position within the next 12 months based on its current capital structure.

In addition to the $588 million of secured bank debt, which falls due in June, Noble has a $378 million bond issue that needs to be refinanced or repaid next March and a $1.1 billion unsecured revolving credit facility, which is due in May 2018.

During the results announcement, the company also said it would not return to profitability as expected in 2017 because of dislocations in the coal markets, which have led to hedging losses. As a result, profitability will be pushed back to 2018 or 2019.

Revenues were up 10.3% during the first quarter to $12.6 billion thanks to a higher average selling price, but fell 17.4% in volume terms to 46.9 million tonnes.  

A number of investors and analysts have subsequently expressed their “disappointment” the group did not flag a potential first quarter loss when it was marketing the bond deal in March. They are also probably kicking themselves for not thinking through Noble's other financial relationships as well. 

Ahuja said, “It doesn’t help market confidence that weak numbers and tight liquidity came to the fore just two months after doing a large bond deal.”

HSBC credit analyst Louisa Lam also wrote that “We would not be surprised if the company faces a distressed corporate restructuring” in a note published on May 12. 

HSBC is one of the banks, which was reported to have participated in the group’s last major bank financing round in 2016 when it raised $1 billion from a revolving credit facility. It paid this back in May using proceeds from the $750 million bond issue led by HSBC, ING, Morgan Stanley and Soc Gen.

Lead arrangers for the earlier $1 billion RCF and a $2 billion borrowing base facility have been reported as: MUFG, Soc Gen, Commonwealth Bank of Australia, DBS, HSBC, ING, Rabobank and UBS.

Can Noble survive?

Noble told FinanceAsia it had always maintained a positive liquidity position and aimed to do so in the future. 

Analysts believe that if Noble can retain its suppliers, hold down its brokers' margin payments, secure a new borrowing base facility and reduce its cash burn, then it will have additional time to find a strategic investor, although none has materialised so far despite more than a year of trying. 

Morgan Stanley is advising on its options. The bank has declared an 8% interest in the group, although this is believed to be shares resulting from its prime broking operations.

Both JP Morgan’s Ahuja and HSBC’s Lam highlight the past experience of the group’s new chairman, Brough, who replaces founder Richard Elman. Brough was previously: chief restructuring officer at Sino-Forest; a liquidator for parts of Lehman Bros, and chief restructuring officer at China Fisheries Group.

“His prior experience as restructuring officer for other Asian companies makes the market (and us) connect some dots,” Ahuja concluded. 

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