RISK MANAGEMENT

Singapore-Listed Noble Group Sells Stake in Noble Agri. Is the Crisis of Confidence Over?

Beleaguered commodities trader Noble Group has concluded terms of disposal of its remaining 49% stake in Noble Agri to China's COFCO International.

If approved by shareholders, the deal will earn the company US$750 million in cash and "additional retention of upside participation in the future growth of Noble Agri, worth up to US$200 million."

The deal comes a month after both Moody's and S&P warned that Noble Group could lose its investment-grade credit rating. In November, S&P noted that the company's adjusted readily marketable inventory and committed undrawn credit facilities have been reduced, which meant that "the liquidity positon of Noble has deteriorated."

Breathing Room

In today's announcement, the company said that "after completion of this transaction, Noble Group's financial metrics will be well in excess of those required of an investment grade credit." The loss of that rating would have meant higher financing costs, which would have been a heavy burden on a trading company that typically operates on significant amounts of borrowed cash.

Noble also said that the sale will ensure that it will exceed the commitment it made last month to generate US$500 million from asset disposals and other transactions. According to the company, it has now received more than US$4 billion in cash over the last four years from its divestments in Noble Agri (which it used to own 100%) and the 2012 merger of Gloucester Coal with China's Yancoal, a controversial transaction that provided ammunition for little-known Iceberg Research and short-seller Muddy Waters to accuse Noble of irregular accounting policies.

Paying Off Debt

The cash from the disposal will be used to pare debt. Adjusted net debt is forecast to fall to US$1.8 billion (from US$2.5 billion as of September 30, 2015) and net debt to capitalization ratio to 43.1% (from 45.1%). 

Noble calculates that, post-disposal, its pro-forma funds from operations/adjusted debt will rise to 27.6% (from 19.8%), above S&P's threshold of 25% for investment-grade credits, and pro-forma retained cash flow/adjusted net debt will increase to 25.5% (from 22.3%), above Moody's threshold of 20%.

The two credit rating agencies are still studying the latest developments in relation to their ratings for Noble.

End of the Crisis?

It remains to be seen whether the planned disposal will end Noble's business slump and the resulting implosion of its stock price, a fall stoked as well by attacks on the probity of its accounting. The continued fall in the prices of commodities, including oil and iron ore, has had a dampening effect on the commodities sector.

In a presentation, however, Noble said that its core business numbers (annualized Q1 2014 to Q3 2015 average) shows "strong underlying pro-forma performance" if Noble Agri's results are stripped out. It said net profit would be US$544 million, "adjusted for share of losses of Noble Agri, impairments and negative goodwill."

In the first nine months of 2015, says Noble, operating income from supply chains at its energy and gas & power segements came to "a record US$971 million" even as cost savings are on track to meet its US$70 million target. 

Noble says it will receive "deferred consideration" equivalent to "5% of the future value creation over and above the total consideration paid by COFCO for the full stake in Noble Agri" -- meaning a future sale of the company or IPO. The deferred consideration is capped at US$200 million.

 

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