Noble Group struggles to prove its turnround will work
Investors reacted badly to the commodities trader’s latest weak results
Over the past 18 months, Noble Group has tried to get itself out of a deep hole by raising almost $3bn through asset sales and bond and share issues.
But for what was once Asia’s largest commodities trader, this fundraising effort might not be enough.
Noble’s shares have dropped sharply after the company revealed this month that problems with contracts to buy and sell coal had left it nursing a $129m net loss in the first quarter of 2017. The prices of its bonds have meanwhile declined to levels that suggest traders see a high risk of default.
This is just the latest setback for Noble and its founder and largest shareholder Richard Elman, who warned at the results that the company may not be profitable until 2019.
Noble has been battered since 2015, as the then downturn in commodities markets coincided with questions about the company’s accounting. Its shares have plunged more than 90 per cent since analysts led by a little known research firm called Iceberg started highlighting how Noble’s profits on long-term contracts to source and supply commodities were not fully matched by cash flow, and this in turn focused attention on whether it could service its large debt load.
Noble founder Richard Elman © Bloomberg
More than two-thirds of the $3bn raised by Noble has been used to repay loans during 2016 and 2017. But the company still had $3.2bn of net debt at March 31.
Unless Noble can bring about a successful conclusion to its lengthy search for a major new shareholder, the company has its work cut out to convince investors and creditors that it has a future.
“It’s too soon to say the banks have given up on Noble but if things don’t improve in the next few months it will get a lot more difficult,” says Mervin Song, analyst at DBS.
“Any respite will be temporary if they can’t show a return to profitability, stronger cash flow, and most importantly an ability to service their loans.”
Noble had sought to draw a line under its troubles in May 2016, when it installed Jeff Frase and William Randall as co-chief executives.
They have persisted with a shrink-to-survive strategy that was pursued by previous chief executive Yusuf Alireza, meaning that Noble has over the past two years largely exited agricultural and metals trading.
But the strategy of doubling down on coal and oil trading does not appear to be working — the company recorded a cash outflow from operating activities of $323m in the first quarter.
A test of Noble’s relationships with its banks is now under way as it tries to renew a $2bn credit facility that helps finance its trading.
This loan involving several banks was due to be repaid this month, but Noble secured a 45-day extension to assist talks with the lenders.
Noble wants a key condition on the facility relaxed, by reducing the stipulation on the company’s minimum tangible net worth — an indication of what might be recovered in a liquidation — from $3bn to $2.5bn, according to people familiar with the negotiations.
One banker involved in the talks said if the loan was renewed, his group would not be among the participating lenders under guidance from his risk department. Noble declined to comment.
Another key test for Noble and its ability to cope with its debt load will come next year when it must find $1.5bn to repay a $379m bond and a $1.14bn loan.
Analysts say the company, to refinance this debt, will probably have to raise funds through a bond issue, share sale or disposals.
They estimate Noble has about $700m in cash plus $400m of unused credit lines, although some of the company’s money is tied up with brokers in derivatives to hedge its trading.
All Noble’s fundraising options appear to face challenges. Issuing new debt could be difficult after Fitch and Moody’s cut Noble’s credit rating further into junk territory last week.
The sale of a stake in Noble to a strategic investor is a possibility, but bankers are doubtful that Sinochem, the Chinese state-controlled chemicals group long mooted as a white knight for the trader, will be interested now it is in merger talks with ChemChina.
Paul Brough, who this month replaced Mr Elman as Noble chairman, has embarked on a strategic review.
“Noble’s resilience has been tested before and will be tested again but given the people and businesses we have at our disposal I am confident that we will develop solutions that will appeal to our bankers, creditors and shareholders,” he said in a statement.
The company has previously strongly defended its financial reporting, and a review by accounting firm PwC in 2015 said it was in line with industry practice.
One asset Noble could sell to raise cash is its portfolio of contracts to source and supply commodities. The net fair value of these deals — or money Noble says it reasonably expects to receive from the contracts — stood at $2.83bn, including hedges, at March 31.
There has, however, been a long-running debate about the value of the contracts, started by Iceberg.
For Noble and Mr Elman, generating cash from these contracts might be the only way to prove the market wrong.
“The market has no confidence in the business model,” says one banker with exposure to a Noble loan maturing next year. “No matter what they say or do, the results don’t get better.”