Article / 17 May 2017 at 10:00 GMT

Weekly Bond Update: Noble bonds plummet on default fears — #SaxoStrats

Fixed Income trader / Saxo Bank
Denmark
  • Last week, Noble Group announced a Q1 loss of $130 million 
  • It doesn't expect to return to profitability before 2018-19
  • Noble Group has since appointed restructuring veteran Paul Brough as chair
  • On the top of his list will be finding a new strategic investor to inject fresh capital 
By Michael Boye

The troubles of Singapore-based commodity trader Noble Group have been well known for a long time. Following the 2014-15 collapse in commodity prices, Noble was forced to restructure its balance sheet. As we noted back then, it did so by letting shareholders assume this burden and keeping bondholders from permanent losses.

The company's initiatives, which have included a rights issue, refinancing of bank credit lines and asset sales in the disposal of several business subsidiaries, seemed to have succeeded in bolstering confidence among bond investors. 

Price development of Noble's 2020 USD bonds reveals its tumultuous existence in recent years
N2020 Source: Bloomberg

In fact, back in March, Noble Group was able to return to debt markets and issue a new 2022 USD-denominated bond at a yield of 8.75%. Meanwhile, the company's existing 2020 USD-denominated bond completed a remarkable comeback, having changed hands at 40 cents on the dollar back in January 2016 to then trade almost back to par only a few weeks ago.

Then came like a bolt from the blue last week's profit warning, when the company announced a  first-quarter loss of $130 million and went on to say that it didn't expect to return to profitability before 2018-19. 

Noble shares and bonds have plummeted in the few trading days since the news broke. The aforementioned bonds, including the barely two-month-old 2022 bond, has dropped to a level of 55 cents on the dollar. 

With at least one report suggesting a possible recovery rate around this level, the current market prices of the bonds is indicative of a high chance being priced of a restructuring or even a worst case default and liquidation event on the company's debt.

Given the history of the former behemoth and blue-chip commodity trader, whose equity market value topped $10 billion not more than seven years ago, a credit event would complete a remarkable deroute. For rating agencies too, it would be a(nother) head-scratcher. Although the three major agencies (Moody's, S&P and Fitch) have rushed to slash credit ratings since the downturn began, they all kept Investment Grade ratings on Noble as late as November 2015. 

For Noble's shareholders, it has been a decade-long downturn
Source: Bloomberg

Fitch, didn't come around to cutting its rating below Investment Grade before May of last year, and has seemingly found no reason to touch its BB+ rating since. A testament to the lagging nature of credit ratings more than anything else, probably. Still, according to a 2014 S&P historical study, their BBB- rated entities have a rare 0.9% chance of defaulting within two years – a scenario which for Noble Group still has some time left on the clock to materialise.

However, in an attempt to avoid this gloomy scenario, Noble Group has brought in the restructuring veteran Paul Brough, who has, among other things, overseen the restructuring of Lehman Brothers (surely no parallel intended!), as new chairman. He will now face a daunting task to turn around the troubled company. 

While liquidity is ample to survive in the short term, the company's problems can quickly become self-enforcing, as the constraints on liquidity will challenge the commodity trader's business model and clients will raise concerns over their counterparty risk.

On the top of the new chairman's list will be finding a new strategic investor to inject fresh capital into the company, and the help might not be too far away in this direction. The company in February confirmed talks with an unnamed strategic investor, which is widely believed to be China’s state-backed Sinochem Group. 

Needless to say, securing the Chinese government as an indirect co-owner would obviously go a long way to solving Noble's problems. But as is the case in any restructuring – or negotiation for that matter – the outcome is highly uncertain and the negotiation position of Noble just became much weaker.

Unless a potential white knight comes in to save the day by taking a high ownership stake at the expense of existing shareholders, and one bond investors would put their faith in, the future of the company will remain clouded.

ffd
 Coming to the rescue? Unless a potential white knight is found, Noble Group's future
will remain uncertain. Photo: Shutterstock

– Edited by Gayle Bryant

Michael Boye is a fixed income trader at Saxo Bank.
2y
fxtime fxtime
Not sure this is a 'bolt from the blue' given the history of this organisation. Obscured and questionable fiduciary management/corporate structure/cashflow reporting has been the Noble embedded policy and I am surprised at how long before the latest 'surprise' took to appear tbh.
2y
Market Predator Market Predator
I tried to find some facts about company in Equity Research of Saxotrader (just for education purposes). Unfortunatelly not available.... Interesting story.

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