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Moody's Cuts Noble's Rating to Junk

Posted by December 30, 2015

Moody's says has concerns over company's liquidity.

The chief executive of embattled commodity trader Noble Group Ltd (NOBGF.PK) defended its financial position after what it called an "unexpected" move by Moody's Investors Service to cut its credit rating to junk status, slamming its stocks and bonds.

The one-notch cut to a Ba1 rating by Moody's, which said on Tuesday it had concerns over Noble's liquidity, means financing will become more costly for Asia's biggest commodity trader, investors said. Moody's had put Noble on review for a possible downgrade in mid-November.

The cut to non-investment grade status came just a week after Noble agreed to sell its remaining 49 percent stake in its agribusiness venture to China's COFCO International Ltd for $750 million in cash. As Noble sought to cut debt swiftly and retain its investment grade rating, the deal was priced comparatively low.

"We clearly feel this decision does not reflect the positive ratings impact of the recent Noble Agri (NAL) deal," Yusuf Alireza told employees after Moody's downgrade, in a letter reviewed by Reuters.

In its official statement, Noble said it will work with Moody's to ensure its rating "reflects the financial metrics that Noble will attain".

Announcing the cut on Tuesday, Moody's said the downgrade also reflected low profitability and consistent negative free cash flow from core operating activities, which exclude proceeds from asset sales. The firm, the first of the three main rating agencies to lower Noble's ratings to junk, said the outlook remains negative.

Noble's shares fell as much as 10.2 percent on Wednesday, to their lowest in two weeks, in heavy trading that made it the most active stock on the Singapore exchange (S68.SI).

The shares have shed around two-thirds of their value since mid-February after allegations around its accounting practices by blogger Iceberg Research. Noble rejected the claims and in August a report by board-appointed consultant PricewaterhouseCoopers found no wrongdoing.

"I expect that ongoing weakness in the company's operating environment could impair Noble's ability to extend the trend of positive cash flow generation," said Mary Ellen Olson, a Hong Kong-based analyst at Credit Agricole (XCA.F).

Noble's bonds due 2020, which had already been trading at levels considered junk, were quoted at 64/66 cents on the dollar, having traded as high as 83 last month. The firms perpetual bonds were quoted at 43/45, 20 points lower from last month's level.

"The cost and security required for revolving credit will increase and suppliers will ask for tighter terms," said Robert Medd, an analyst at Hong Kong-based GMT Research, "all of which will reduce margins."

In its downgrade, Moody's said the worsening year-long rout in commodities, which has punished prices of raw materials that Noble handles from oil to copper, has overshadowed cost-cutting plans and will likely hurt access to funding and challenge its profitability.

Earlier this month, its peer Standard & Poor's said the agribusiness sale could "weaken Noble's business position, including its business diversity and long-term competitiveness". S&P currently rates Noble at BBB-, a single notch above junk status, but has placed the rating under review with negative implications.

Meanwhile Fitch Ratings has a stable outlook on its rating for Noble of BBB-, again just one notch above junk.

"I am sure Fitch and S&P will catch up soon, the bonds are already trading at sub-investment grade levels," said one Singapore-based bond trader, speaking on condition of anonymity.

Reporting by Anshuman Daga and Umesh Desai

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