NOBLE Group's shares and bonds took yet another beating on Wednesday as the firm saw its worst fears realised: Rounding up what has already been a turbulent year for the commodity trader, its credit rating was cut to "junk" status by Moody's with a negative outlook.
The credit-rating agency said that the downgrade was due to its concerns over Noble's liquidity, low profitability and consistent negative free cash flow from core operating activities.
"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," said Moody's senior credit officer Joe Morrison.
Shares in the firm plunged 9 per cent to 40 Singapore cents, just above an 11-year-low of 38 cents seen in October, while its bonds due 2020 fell 5.8 cents to 64.059 cents on the dollar.
Noble, in its usual defiant stance when faced with critical assessments, blamed the decision by Moody's on the latter's inability to differentiate between upstream producers and asset-light traders.
"Whilst we respect Moody's decision, we are of the firm view that, once the just-announced Noble Agri deal closes, our rating metrics will substantially exceed those required of an investment grade credit," it said in a statement.
The move by Moody's comes a week after Noble announced it was selling its remaining 49 per cent stake in its agriculture unit to China's state-owned grain trader Cofco. Noble - which has said that the strength of its balance sheet is now its top priority - said then that its financial metrics after the completion of the deal will be "well in excess" of those required of an investment grade rating.
Moody's, commenting on the US$750 million (S$1.06 billion) Noble will receive for the sale, noted that this would improve the firm's liquidity profile.
But "Noble's liquidity remains constrained despite the company's well-developed plans to further improve the situation in the coming months," it added.
Noble said that it is "unfortunate" that the Noble Agri transaction has been outweighed by Moody's negative view of commodity producers.
"As an asset-light supply chain manager, the current environment is opportunity rich and plays to our strengths, while the low price environment substantially reduces the working capital required to support our business," it said.
A rating downgrade would have severe repercussions for Noble as the firm, like many commodity traders, borrows heavily to buy and sell large cargoes of oil, coal and other products.
It has tried to downplay the potential impact of a credit rating downgrade; its CEO Yusuf Alireza said in a results briefing last month that losing an investment grade rating would result in additional margin calls of US$100-200 million from counterparties, which would be "insignificant".
In a letter to employees on Wednesday, Mr Alireza said that the move by Moody's had been "unexpected".
"We clearly feel this decision does not reflect the positive ratings impact of the recent Noble Agri deal, but rather follows on from their recent lowering of ratings across the entire commodity sector," he was reported by Reuters to have written. "It seems that Moody's credit committee were not able to differentiate between an environment that is clearly challenging for upstream players and one that opens up opportunities for an asset-light trader like ourselves."
Moody's also said that it expects Noble to remain "constrained" in its ability to gain consistent access to the bond markets. Credit analysts have noted that Noble's bonds have been trading more like junk bonds in recent months.
"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 said.
Confidence in Noble has fallen this year as it came under scrutiny for its accounting practices and also recorded weak results amid a commodity rout.
Accusations by Iceberg Research - which Noble claims is the work of a disgruntled former employee - that Noble "grossly overstates" the value of its assets and books profits on long-term contracts way before it receives cash for them have cast a shadow over its share price. The stock has lost more than 60 per cent of its value this year, making it the worst performing member of the Straits Times Index.
Noble on Wednesday also pointed out that it continues to enjoy investment-grade status with Standard & Poor's (S&P) and Fitch, even as it said that it will work with Moody's to ensure its rating reflects the financial metrics Noble will attain.
S&P has said that Noble's liquidity level remains weak even after the Noble Agri transaction, and that the sale of the unit could weaken its business position, including its business diversity and long-term competitiveness.
Fitch Ratings said on Nov 20 that Noble has just enough liquidity in the next 12 months to support its rating, and any weakening in its liquidity position could result in negative rating actions.
This article was first published on December 31, 2015.
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