HONG KONG ( Breakingviews) – Noble Group must convince its lenders to give it more time. The struggling Asian commodity trader desperately needs to extend a $2 billion credit line this month. But credit and equity investors are betting the company’s debts are probably unmanageable, and a bankruptcy filing or some similarly painful fix is likely.
Financial institutions have hired lawyers to assess the case for extending the facility to year-end, and consultants to assess collateral values, the Financial Times reported on June 6, citing sources with knowledge of the discussions.
The banks have lent using a secured “borrowing base facility”, which offers both cash and the ability to fund trade by issuing letters of credit. Moody’s estimates Noble’s liquidity headroom, of cash and undrawn debt, at $1.2 billion. That would more than cover the $620 million in cash that S&P says was drawn down. But yet more debts come due next year. And losing the facility would be a serious operational blow – credit is the lifeblood of commodity trading.
Noble’s long-running problems began with critical reports by a short-seller and deepened as commodity prices fell. Natural resources prices perked up over the last year, which helped Noble raise fresh debt and equity. But the recovery petered out, after ructions in coal triggered a surprise quarterly loss, and departing Chairman Richard Elman warned it might not be profitable again until at least 2018.
Stock and bond investors took the warning. The five-year bonds Noble issued in March are now bid at less than 36 percent of face value and credit default swap prices have soared. Its stock market value has crashed to $300 million, down from a peak of $11 billion in 2011.
That leaves the company’s lenders. Some of them are also exposed via a $1.1 billion revolving credit line due in May. They might suffer more by choking Noble’s access to credit now. But if they are to be lenient, they will need to believe last quarter’s slip-up was an aberration and Noble can start generating cash. They will also need to believe new Chairman Paul Brough, a restructuring veteran, can steady the ship quickly, either by bringing in a new investor, or selling off more assets, where previous efforts have fallen short.
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