The embattled Noble Group returned to the international bond markets on Monday with a $750 million Reg S transaction, which may remove any lingering concerns about the company's immediate debt repayment abilities.
The Singapore-listed group has endured a very stormy ride ever since anonymous research firm Iceberg accused it of accounting irregularities two years ago. These allegations remain unproven, but prompted Noble’s stock and bond prices to quickly sink to distressed levels.
However, fixed income fund managers, at least, appear to have renewed faith in the group's ability to pay them back.
So far this year, Noble Group has been one of the best performing credits in the Asian high-yield market. Its outstanding 6.75% January 2020 bond, for example, has climbed 15 points since the beginning of January to a mid-price of 98.5% at Monday's close
The group's new five non-call three-year bond deal seems to have been perfectly timed to take advantage of this momentum, as well as the buoyancy of the wider bond markets where investors are still jumping all over yield assets.
Bankers working on the B2/BB+ rated deal said it attracted a peak order book of $2.9 billion. Pricing was fixed at par on a coupon and yield of 8.75% after initially being marketed around the 9% level.
"It's a fantastic result for Noble," said one banker. "They've made substantial progress bringing down their debt levels and this deal's success is a reflection of how the market now views them."
Proceeds are being used to bolster the company's liquidity position. According to the bank's online roadshow, Noble had liquid assets of $3.548 billion ahead of the deal ($1.105 billion in readily available cash, $943 million in unutilised commercial facilities and $1.5 billion in readily marketable instruments).
This is more than enough to cover the $1.294 billion of bank debt ($650 million term loan and $644 million revolving credit facility), which matures in May. In its roadshow presentation, the company also said it is in, "ongoing discussions with the banks on re-financing the May 2017 maturities."
Yet, Iceberg, queries the rationale behind the bond deal.
In emailed answers to FinanceAsia ahead of pricing, the group said, "They're trying to raise the prohibitive 9% bond deal to replace the revolving credit facility (RCF). We can safely assume that many banks are not willing to renew the RCF this year otherwise Noble would not launch this bond."
The research group is also not convinced about Noble's repayment abilities.
"The bond market was reassured by the $500 million equity injection and asset sales," it continued. "However, Noble's structural inability to generate positive cash flow plagues the company and raises strong concerns over its ability to repay debt."
New issue premium
The huge amount of noise surrounding the group is one reason why it had to pay a premium to get the bond deal away.
By comparison, lower rated Vedanta Resources is trading almost 270bp tighter on a like-for-like basis. Its recent 6.375% July 2022 bullet bond has a B3/B+ rating and was quoted at a mid-yield of 6.07% at Monday’s close.
Syndicate bankers suggest Vedanta’s 2020 to 2022 curve is worth 100bp (53bp for the credit curve and 43bp for the rates curve).
On this basis, they pitch fair value for Noble’s new bond at roughly 8.5% based on the 7.43% mid-yield of its outstanding 2020 bond.
Final distribution stats show a final order book of $2.4 billion with participation from 218 accounts. By geography, Asia took 65% and EMEA 355. By investor type fund managers were allocted 79%, followed by private banks on 18% and banks 3%.
All of Noble’s outstanding dollar bonds have been severely buffeted over the past few years.
The January 2020 bond, for instance, dropped from a high of 112.6% in June 2014 to an all-time low of 41% in January 2016 according to S&P Capital IQ figures.
The group’s 6% perpetual meanwhile, was still trading at only 54 cents on the dollar as recently as this January.
It began rebounding in early February shortly before rumours surfaced that Noble is in discussions with a potential strategic investor. At this point, the bond was trading around the 67% mark.
On Monday, it closed at 84.5%, equating to a 7.517% yield-to-maturity: extremely tight relative to the 2020 bond given the perpetual has a much longer tenor and is structurally subordinate.
Where the new 2022 bond is concerned, Noble has structured the deal so it can partially redeem some of the notes if it raises new equity capital through one or more issues by 2020. Terms incorporate an equity clawback for up to 40% of the principal amount.
Newswires say the undisclosed potential strategic investor is the Sinochem group. Its chairman, Frank Ning, is well known for his love of M&A and previously purchased Noble’s Agri business when he ran Cofco.
However, on February 24 Iceberg published a new research report entitled “How many times can you fool the same people?”
This report concludes that the reason why rumours about a potential strategic investor sound so familiar is because it “has already happened a few times.”
Iceberg further states that even if the rumours are true it does not change its belief that Noble has overstated the value of its contracts.
Divergent equity and debt performance
Indeed, Lucror Analytics recently pointed out that there remains open water between the views of equity and debt investors.
Whereas Noble’s bonds have bounced back towards par, the group’s share price is still languishing close to its all-time low around S$0.112 per share (90% lower than the S$1.107 level it was trading at its peak in June 2014.)
As rumours about Sinochem began to surface, the stock climbed 54.2% from S$0.175 on February 2 to S$0.27 on February 23 when Iceberg’s new report sent it back into freefall. Since then, the stock has fallen 18.6% to close at at S$0.22 on Monday.
Noble released a statement to the Singapore Stock Exchange on February 13 confirming talks with an undisclosed third party.
Valuing level three assets
For equity analysts, the key issue is how to value the group’s assets, such as its long-term off-take agreements.
DBS, for instance, ascribes no value to Noble’s associates, joint ventures, intangibles or level three assets (assets chosen by the company and whose fair value cannot be determined using observable measures).
Iceberg believes this does not go far enough. It told FinanceAsia, “If you read Noble’s annual report, the year we published, it is clearly mentioned that Noble not the auditor chooses whether assets are level two or three. So everything is a black box except level one.”
DBS adds that a sustainable rally in Noble’s share price is unlikely while questions remain about the “quality of its earnings.” It notes that S$126 million of unrealised gains from level three assets boosted adjusted 2016 net profit of $8.7 million.
It suggests investors’ concerns can be overcome if the group is able to generate sustainable free cash flow and divest some of its associates, or level three assets, at or above book value – thereby re-affirming Noble’s valuation methodology and prompting analysts to revise their net asset value figures for the group.
DBS also believes that while founder and chairman Richard Elman is still the largest shareholder with a 22.3% stake, it is the Chinese who are now in the “driving seat.”
China Investment Corp currently has two board seats after taking up its full rights entitlement last summer.
Many analysts have also noted the synergies between Noble’s US oil trading business and Sinochem’s.
However, JP Morgan credit analysts caution investors to be mindful of how a potential deal might be struck. They believe the market may be disappointed if one comes at the operational rather than group level.
De-leveraging the balance sheet
One thing which remains very clear is the money Noble has raised to ease its financial position over the past year. Primarily, this includes a $500 million rights issue, the $1.2 billion sale of Noble Americas Energy Solution to Calpine Corp, plus the sale of Noble’s European power and gas book.
In its online roadshow, Noble also highlights that it has downsized its metals business and cut headcount from 1,525 to 1,050 as of December. A further 150 job losses are expected during the first half of this year.
As a result of these sales, the group says its liquidity headroom has increased from $800 million last June to $2 billion as of December.
This reduced net debt to capitalisation from 55% in 2015 to 47% at the end of the 2016 financial year. Net debt stood at $2.872 billion at the end of 2016.
"With the re-capitalisation of the group and exit from loss-making businesses we are now positioned to direct capital towards our core leading franchises," it concluded in the online presentation.
This story has been updated to correct the spelling of Richard Elman's name and include final distribution statistics