What a Noble Group Capital-Raising Would Look Like
Raising the 10% extra equity its peer Glencore recently did would still leave it short
When the going got tough this summer, commodities traders Glencore and Olam raised equity capital. Despite its own tough times, Singapore-listed Noble Group hasn’t yet gotten going.
In the past three months, Noble’s share price has dropped 35% and one of its bonds has lost 20% of its value as concerns over the company’s aggressive accounting has grown. Its stock and bond prices steadied this month, but the bad news out of China now means the outlook for commodities, and those who supply them, won’t be improving.
Glencore sensibly issued $2.5 billion of new equity last week. Separately, Singapore-listed agricultural trader Olam sold a $1.1 billion stake to Japanese trader Mitsubishi.
Noble hasn’t followed, though it needs equity more urgently than Glencore. While the latter’s credit is still rated two notches above junk status, Noble’s is right on the edge. The outlook on the trader’s debt was recently cut to negative by both Standard & Poor’s and Moody’s, putting it close to a downgrade to junk, which could imperil Noble’s ability to access cheap capital.
If Noble bit the bullet, how much capital could it raise? Glencore issued 10% more shares. If Noble did the same, at a 5% discount to its current stock price, it would raise $200 million, not nearly enough to meet its coming obligations.
As of June, Noble reported $3.5 billion of debt due in 12 months. Since then, it says it redeemed bonds worth $735 million, including a $500 million note due August 2015, by using cash and loans. That means it now has $3 billion of borrowings due by June 2016. Noble didn’t specify, but let’s assume it used its cash on hand for a third of the $735 million redemption and raised the rest by tapping a three-year bank facility.
Noble may be able to roll over some of the $3 billion debt maturing soon. But if not, after counting the cash it can definitely access and the committed bank facilities it still hasn’t drawn on, it will be $925 million short of what it needs for repayment. To get that all from the stock market, Noble would have to issue equity equal to 46% of its existing shares.
Noble could place shares with a strategic investor—perhaps a Japanese conglomerate, as Olam did. Such an investor might be comforted by Noble’s announcement Wednesday that founder Richard Elman will step down from the audit committee, giving more voice to others during the company’s controversial accounting deliberations.
Yet having already sold 51% of its agricultural unit last year, Noble lacks Olam’s key attraction. Most Japanese traders already deal in the hard commodities that Noble specializes in. And even if it did find a willing investor, bringing in an outsider to snap up 46% of the existing shares—or 32% of the enlarged company—would painfully dilute current owners.
Alternatively, Noble’s management could double down, as Glencore’s did. If Noble has to raise $925 million, Mr. Elman would need to spend about $200 million to maintain his stake.
Noble could avoid having to raise equity if its operations began generating cash, something they haven’t managed in a while. Otherwise, Noble will have to follow its peers—if it can find someone willing to pony up the cash.