June 14, 2017 10:00 am JST

Noble's woes raise specter of commodities meltdown

Market watchers worry key Asian player could become the next Glencore

YAYA OZAKI, NQN staff writer

TOKYO -- Once the shining star of Asia's commodities market, Noble Group is now facing trouble on all sides with a net loss for the January-March quarter, a stock price plunge, massive debt and harsh credit ratings downgrades.

The Hong Kong-based, Singapore-listed company announced May 11 a net loss of $129 million for January-March, compared with a $40.5 million profit a year earlier. The company suffered heavily from the decoupling of the Newcastle index, a spot benchmark for thermal coal, from the actual market.

Noble founder Richard Elman stepped down as chairman over the loss. "It will be a long, hard slog with ups and downs along the way until we regain profitability," he said in a statement to shareholders, adding the goal will likely be achieved in 2018 or 2019.

Ratings reductions

On May 22, S&P Global Ratings cut Noble's rating three rungs, from B+ to CCC+. "The company's capital structure is not sustainable," S&P said in a statement, citing weak cash flow and low profitability. It holds a negative outlook on Noble, given the risk of the company failing to repay its debts. Fitch Ratings also downgraded the commodities trader by three notches on May 25.

Naturally, investors rushed to unload Noble stock. The shares had been declining ever since Iceberg Research criticized the group's accounting practices at the beginning of 2015. But the quarterly loss and ratings cuts triggered a more dramatic plunge. The stock sank 32% on May 11, then by another 24% the next day. On May 23, it dropped 28%. It has hit a 17-year low this month. Meanwhile, yields on its bonds have shot up, making it nearly impossible for the company to raise funds normally through the market.

Noble's market capitalization has shrunk by 1.4 billion Singapore dollars ($1 billion) in the past month, and by S$5.4 billion the last two years. It is almost hard to believe that Noble was once among Singapore's top 30 stocks that make up the benchmark Straits Times Index.

Looming deadlines

Noble must repay over $2 billion in debt by May 2018. The bulk of the $656 million due this year is owed to financial institutions. One of the company's most pressing concerns is an upcoming payment deadline at the end of the month.

Some expected Chinese chemical giant Sinochem or China Investment Corp., which owns a stake in Noble, to rescue the embattled commodities trader. But neither have made moves so far. Others have argued that Noble's main lenders will continue providing funds to keep the company operating. Recent news reports suggest Noble is seeking an extension on its loans, and that banks are considering rolling over credit facilities made available to Noble.

Potential sell-off

The commodities market has been shaken by the uncertainty swirling around such a major player. "Noble will likely start converting its oil and coal holdings into cash," said Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp. A sell-off in the spot and futures markets could cause a crash in commodities prices, he said.

When Swiss giant Glencore ran into trouble, it sold off assets to pay down debt. It later staged a recovery on rising copper prices, fueled by hopes for increased demand in China. Market players worry that Noble will take a similar approach, which could send ripples throughout the commodities and financial markets.

Singapore's state-owned Temasek Holdings came to Olam International's rescue five years ago, after the commodities trader saw its stock drop on a critical report by U.S.-based short seller Muddy Waters Research. Noble also needs to secure cash instead of simply rolling over debt. Unless Noble finds its own savior, the market could be in for a rough ride.

NQN deputy editor Atsushi Otani contributed to this report.

Asia300

Olam International Ltd.

Singapore

Market(Ticker): SES(O32)
Sector:
Industry:
Consumer Non-Durables
Food: Major Diversified
Market cap(USD): 4,003.90M
Shares: 2,832.22M

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