Even before Glencore made a dramatic appearance on the world's distressed commodity trader stage in late August, Zero Hedge readers were familiar with its Asian cousin, Noble Group, also known as Asia's largest commodity trader, a name we covered in our August 18 report "Noble Group’s Kurtosis Awakening Moment For The Commodity Markets."
Back then we said that "we expect a big announcement of S&P on Noble Group later this week" as a result of the ongoing deterioration in the company's fundamentals as well as various market-traded securities, notably its stocks and default swaps. As a reminder, in mid-August, Noble's CDS was trading just around 700 bps.
The rating agencies were late, but at long last, S&P did what we expected it would months later, on November 23, when it finally "placed its 'BBB-' long-term corporate credit rating on Hong Kong-based supply-chain management service provider Noble Group Ltd. and the 'BBB-' issue rating on the company's senior unsecured notes on CreditWatch with negative implications." It added that:
The CreditWatch action reflects our view that Noble's liquidity and financial leverage have weakened and breached levels that we consider appropriate for the current rating. However, management's commitment to raise new capital could support the company's credit profile.
Noble's liquidity deteriorated in the third quarter of 2015 following a 27% decline in the company's net available readily marketable inventory to US$1.48 billion as of September 2015 from US$2.0 billion in June 2015. The deterioration was largely related to the fall in commodities prices. The company's available and undrawn committed credit lines fell almost 50% during the period to about US$1 billion. The company's cash sources are less than 1.5x cash uses as of September 2015, below the threshold for a "strong" liquidity assessment.
Then moments ago, Moody's which likewise put Noble on downgrade review a month and a half ago on November 16, decided there is no further need for ratings foreplay, and without a reason to keep beating around the bush, proceeded to downgrade Nobel from investment grade (baa3) to junk, or Ba1, justifying its decision by saying that it "expects that Noble's ability to gain consistent access to the bond markets will remain constrained. This challenge is unusual for investment grade entities and the sporadic nature of its access is a characteristic that is more consistent with that of Ba-rated entities."
Here is what else it said:
Moody's downgrades Noble Group to Ba1; outlook negative
- Moody's Investors Service has downgraded Noble Group Limited's senior unsecured bond ratings to Ba1 from Baa3 and the provisional rating on its senior unsecured MTN program to (P)Ba1 from (P)Baa3.
- At the same time, Moody's has assigned a Ba1 corporate family rating to Noble and has therefore withdrawn the company's issuer rating.
- The rating actions conclude Moody's review for downgrade initiated on 16 November 2015.
RATINGS RATIONALE
"The downgrade of Noble's ratings reflects Moody's concerns over the company's liquidity," says Joe Morrison, a Moody's Vice President and Senior Credit Officer.
The Ba1 ratings also reflect low levels of profitability and consistent negative free cash flow from core operating activities, which exclude proceeds from asset sales.
"The downgrade also reflects the uncertainty as to whether or not these factors can be improved sustainably and materially, given our expectations of a prolonged commodity downcycle, and the consequent negative sentiment impacting Noble and commodity traders in general," adds Morrison.
Moody's notes that the global commodity downturn has become severer over the last one to two months and believes these negative conditions might erode Noble's access to funding and could therefore challenge its profitability, prompting Moody's to conclude the rating review.
Moody's also notes the announced sale of its remaining 49% stake in Noble Agri Limited (unrated). The expected receipt of $750 million from the sale will improve Noble's liquidity profile and adjusted net debt/EBITDA to about 3.2x in 2015.
However, Noble's liquidity position remains constrained, despite the company's well-developed plans to further improve the situation in the coming months.
Overall, Moody's views that Noble could continue to face pressure to move more of its bank funding to a secured platform, if it faces challenges to access unsecured debt funding.
Moody's also expects that Noble's ability to gain consistent access to the bond markets will remain constrained. This challenge is unusual for investment grade entities and the sporadic nature of its access is a characteristic that is more consistent with that of Ba-rated entities.
Moody's understands that Noble plans to engage in further capital raising activities and aims to improve its operations such as to lower operating expenses, lower working capital utilization, and strengthen cash flow generation.
If it achieves such aims, the company will exhibit an improved liquidity profile that supports its Ba1 ratings. Its leverage metrics should also improve and therefore provide further support to its Ba1 ratings.
Moody's "understands" Noble plans to deleverage... but doesn't really believes it: the punchline: "The outlook for the ratings is negative."
The negative ratings outlook reflects the execution risk associated with Noble's plan to improve its liquidity position, as well as the uncertainty arising from the commodity price environment, and the impact that increasingly lower commodity prices globally will have on companies with exposure to commodities.
Noble's ratings are likely to be downgraded if its liquidity position does not show a meaningful improvement, or its leverage rises, such that its adjusted net debt/EBITDA registers in excess of 4.5x and retained cash flow/net debt trends below 20% on a sustained basis.
Noble Group Limited is the largest global physical commodities supply chain manager in Asia by revenue. Its diversified activities across the supply chain include the sourcing, storage, processing, transportation, and distribution of over 20 commodity products.
Headquartered in Hong Kong, Noble Group Limited operates offices in 60 locations globally, and employs 1,900 staff.
And now we wait and see what if any collateral demands the company's thousands in counterparties will make over the coming hours. The market, however, does not have that luxury: as of today, Noble's CDS is at 1,600 in running spread, widening by 900 bps since we first brought our readers' attention to the name, and a 77% implied probability of default.
We expect there is even more downside to the company's risk profile if the downgrade to Junk leads to a spike in margin calls, which leads to a toxic liquidity spiral, as the company is forced to liquidate even more assets at firesale prices just to satisfy counterparties, further exacerbating its solvency and leverage profile, ultimately leaving management with no choice but to advise its creditors it will be unable to satisfy its debt obligations.
Finally, since Noble is not a Chinese company, it is very unlikely that any government will come to its rescue when the inevitable push comes to shove, unless miraculously, somehow commodity prices stage a dramatic rebound over the next 3 months.