Struggling Noble Group faces key financing test after market slump

SINGAPORE/HONG KONG (Reuters) - Singapore-listed Noble Group faces a major challenge over the next few weeks as it negotiates a rollover of credit facilities against the backdrop of a shock quarterly loss that pummeled market confidence in the commodity trader.

FILE PHOTO: A Noble Group sign is pictured at a meet-the-investors event in Singapore August 17, 2015. REUTERS/Edgar Su/File Photo

A $2 billion credit facility, secured on its inventories and working capital, is due to be rolled over by the end of June. Noble has already drawn about $620 million cash from the one-year facility.

“We are starting to talk to the core participant banks about a new borrowing base facility which would again feature a cash draw down component,” Noble said in response to a query from Reuters.

Short-term financing is the lifeline of trading houses which operate on thin margins and rely on such funding to support their working capital needs. For Noble, obtaining such financing has become challenging due to its weak operating performance.

“The June refinancing is paramount to the company,” said Andrew DeVries, an analyst at independent financial research firm CreditSights, adding a bank would normally be comfortable loaning $600 million-$700 million on a secured basis because Noble’s trading book and inventory are worth $4.6 billion.

“However, the recent drop in the stock and bonds combined with a Moody’s downgrade is enough to scare a lot of banks away from further Noble business, regardless of collateral value,” said New York-based DeVries.

Noble has lurched from one crisis to another since it hit the spotlight in February 2015 when Iceberg Research accused it of overstating its commodity contracts by billions of dollars as it battled a commodities downturn.

That sparked a share price collapse, writedowns and debt downgrades to junk status, forcing it to sell assets, raise $2 billion and cut jobs. Noble has rejected Iceberg’s claims and has stood by its accounts.

Noble’s shares slumped by as much as 57 percent to the lowest in 15 years and its bonds due 2022 lost half of their value, following an unexpected quarterly profit warning last week.

Ample access to credit is an essential business requirement for commodity merchants as single supply deals for products like oil or coal span months or even years covering huge volumes worth hundreds of millions of dollars.

The discussions with banks on the credit facilities are taking place at the same time as Noble kicks off a strategic review of its businesses under new chairman Paul Brough, while also exploring “strategic alternatives”.

How these moves pan out would also determine the amount of credit facilities that would be rolled over, a source familiar with the situation said on Thursday. The person said Noble is working with European and Asian commodity lenders on the financing.

Noble’s market value has shrunk to about S$919 million ($661 million) from about $6 billion in February 2015.

Some analysts said the company faces a big challenge to turn around its operating performance.

“Noble has talked of its business as a brokerage business capable of delivering profits despite direction of commodity markets,” said Rick Mattila of MUFJ Securities, adding the trading loss raises questions about its ability to “deliver results on a consistent basis.”

Moody’s Investors Service cut Noble’s rating further into junk territory this week, and Fitch Ratings downgraded its long-term rating on Noble, blaming weak returns.

“The downgrade reflects heightened concern over Noble’s liquidity stemming from its weak operating cash flow and large debt maturities over the next 12 months,” said Gloria Tsuen, a senior analyst at Moody’s.

The company’s next challenge is debt of $1.5 billion due next year.

“We are likely to take further negative rating action if Noble does not work toward addressing the 1H18 debt maturity in the next three to six months,” Fitch said.

Reporting by Anshuman Daga and Umesh Desai; Additional reporting by Henning Gloystein; Editing by Muralikumar Anantharaman