Noble Group Debt Trades Like Junk With Record Maturities Looming
by David YongChristopher Langner
12:00 AM HKT, March 17, 2015
(Bloomberg) -- Noble Group Ltd., Asia’s biggest commodities house, is being punished by traders as it faces record bond maturities and closer scrutiny of earnings amid a global resources rout.
Dollar-denominated notes of the company, which has the lowest investment-grade scores from the three main rating companies, yield more than 400 basis points above Treasuries. That compares with the 317 average for top junk-rated Asian borrowers, Bank of America Merrill Lynch indexes show. The cost to protect the company’s notes against non-payment has risen 144 basis points in the last month to 412, the worst performing in Asia and 55 above junk-rated Australian firm Fairfax Media Ltd.
Noble, founded by billionaire Richard Elman in 1986, faces about $1 billion of debt due this year after posting its first quarterly loss since 2011 as commodity prices approached a six-year low. It denied allegations from an anonymous group called Iceberg Research that it overstated accounting gains, and rejected a demand for unpaid compensation in a lawsuit from its former chief executive.
“The CDS levels indicate the market isn’t totally convinced by Noble’s rebuttals,” Ray Wepener, a proprietary credit trader in Hong Kong at Woori Investment & Securities (HK) Ltd., said by phone on March 13. “The bonds are trading as if they have been downgraded.”
Olam, Cofco
The spread on Noble’s dollar notes due January 2020 has widened to 456 basis points from 307 before the Iceberg reports. The yield premiums above Treasuries on U.S. currency bonds with similar maturities from commodity-related firms Olam International Ltd., Cofco Corp. and Glencore Plc have either moved little this year or tightened.
Stephen Brown, a spokesman for Hong Kong-based Noble, declined to comment on movements in the company’s bonds or credit-default swaps and its financing.
Noble said on March 5 Iceberg’s claim that $3.8 billion of fair-value gains are overstated and should be impaired was “false.” The company also said that former CEO Ricardo Leiman, who is suing the company for a 2011 bonus and stock entitlements, shouldn’t get them because he discussed setting up a rival business.
The company’s $1.21 billion 6.75 percent notes due 2020 have slumped 5.7 percent since Feb. 15, when Iceberg issued the first of two reports, according to Bloomberg-compiled prices. The 6.625 percent notes due 2020, which are callable in August this year, lost 1.2 percent. Noble bought back $15 million of those notes, it said in a filing today, bringing the amount outstanding to $235 million.
Questions Reasonable
Standard & Poor’s grades Noble BBB-, on par with Baa3 at Moody’s Investors Service, with both maintaining their ratings since the earnings setback and Iceberg reports. The company still has a “strong liquidity buffer” against maturing debts, said Cindy Huang, an S&P analyst based in Hong Kong.
“Bond yields and spreads are comparable to performing BB credits, so there isn’t yet any worry about default,” Trung Nguyen, a Singapore-based credit analyst at Lucror Analytics Pte, said on March 13. “I guess investors have some doubts about Noble’s revenue and earnings recognition and whether or not the book values of mark-to-market assets were reasonable.”
Noble has a 0.69 percent chance of defaulting over the coming year, up from about 0.3 percent a year ago, according to the Bloomberg default-risk model that takes into account factors such as indebtedness and stock performance. The model suggests the company deserves the highest junk ranking.
The trading house’s debt due this year includes a $500 million bond and 300 million ringgit ($81 million) of notes, according to data compiled by Bloomberg. Another $235 million of 2020 bonds are callable in August and its balance sheet shows $440 million of short-term bank borrowings.
Ratios Improve
The company’s total debt exceeding earnings before interest, tax, depreciation and amortization improved to 3.8 times in 2014 versus 6.3 times a year earlier, according to data compiled by Bloomberg. The interest coverage ratio also improved to 4.5 times from 2.5 times over the same period.
Noble last year sold 51 percent of its grains-trading unit to China’s Cofco and a group of investors. Most of the proceeds were used to repay short-term debt, Chief Financial Officer Robert van der Zalm said in a Feb. 26 earnings conference. Since then, it’s drawn down some loans for working capital and investments.
“We’re now in a comfortable position with a strong BBB-credit and our intention is to maintain this position,” and Noble has access to $5.1 billion of cash and unutilized committed facilities, he said.
‘Black Box’
Moody’s cut Noble’s outlook to stable from positive in November “because they indicated they would invest a large portion of the proceeds to grow the business rather than reduce debt,” the rating company’s Hong Kong-based analyst Joe Morrison said on March 13.
While the company’s shares have lost 23 percent to S$0.93 since the first Iceberg report, the reaction isn’t without precedent.
Local peer Olam International slumped 20 percent over a four-week period after Carson Block of Muddy Waters LLC questioned its accounting methods in November 2012. Temasek Holdings Pte. last year boosted its Olam stake to 80 percent in a takeover offer.
“The market has repriced somewhat as investors realized that Noble is actually more complex, and that they understand much less than they thought they did,” said Nguyen at Lucror Analytics. “Some investors are starting to feel that Noble is like a black box.”
To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Christopher Langner in Singapore at clangner@bloomberg.net
To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; Sandy Hendry at shendry@bloomberg.net Chris Bourke, Ken McCallum