Noble Calling

Noble Group: headquartered in Hong Kong, listed in Singapore, bonds held worldwide (hopefully).

International commodities merchandiser Noble Group yesterday announced that it is seeking to launch its first international straight dollar bond. The company is looking to raise $500 million through a ten year, non-call five structure. The bonds will be Reg-S 144A. JPMorgan is sole book runner on the deal.

The company will be going on simultaneous road shows, with the A team going to Singapore today, Hong Kong on Friday and various European destinations next Monday, Tuesday and Wednesday. The B team will be going to various US cities from today until next Wednesday. Launch and pricing of the deal will follow thereafter. It is understood that CEO Richard Elman will be on the Asian and European leg.

The bonds have been given a Ba1/BB+ rating by Moody's and S&P. Noble plans to use the proceeds to repay debt at the operating level by replacing it at the holding company level. The bonds will also enable it to lengthen the maturity profile of its debt while giving it some ammunition to make acquisitions.

This strategy will allow the management to issue more debt in the future at the holding company level and move away from funding secured at the operating level with liens on property and assets. This reflects the growing maturity of the company.

Founded in 1987, Noble Group is a spectacular success story. From 2000 until 2004 its revenues grew by 619%. In 2004 its profits of $286 million were 367% higher than they were in 2003. It now has built itself into a business with a market of cap of S$3.4 billion ($2 billion) in little over 15 years.

From a credit stand point, the company has $1.5 billion of liquid assets comprising cash, inventory and money owed in accounts receivable. Nevertheless, the pressure of fast growth led the company to record a negative operating cash flow in 2004 of $47.8 million. However, this is understood to be more of an acccounting issue than an operational concern. Its exposure to some of the world's biggest emerging markets such as China, India and Russia, is the source of much of its equity potential but also its major credit risks. The company is understood to be investing heavily in new systems to help it mitigate some of these operational risks.

In recent years, the company has changed its strategy as well, going from an asset light, high margin trader to a more integrated supply chain manager, which owns assets up and down the chain. In the third quarter of 2003, for example, it increased its stake in Australia's Donaldson Coal from 6% to 50%. Such a move allowed it to own more of what it was already selling to markets such as China. The company is now looking at buying more mines, oil storage tanks and other shipping assets.

With a successful bond deal under its belt, the company will have completed a full house of capital raising transactions in recent years. Two equity placements in 2003 were followed by a $200 million convertible in 2004. This deal was also sole managed by JPMorgan.

The choice of using a sole book runner for this bond will clearly be welcome news to the bank. But it will also make selling the credit story of the issuer slightly easier. Noble's finances and name are such that it would appeal to some of the more credit conscious investors, while its rating and relative exoticism will attract the high yield investors. Coordinating that kind of sales pitch and getting the pricing right could be complicated if more than one bank were selected. Nevertheless, just selecting one book runner is always a high-risk strategy.

Confusing the issue further is the lack on clarity with the comparables. The two most comparable issues are by two US companies, Glencore and Bunge. Both these companies have Baa3/BBB- ratings and both have nine years of a ten-year bond outstanding. However they trade 130bps apart, with Glencore at 200bps over treasuries and Bunge at 70bps over. Finding where Noble fits in this pattern will be the job of the next week.

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