Noble shares drop after S&P cuts rating to junk

Noble Group shares took a hit yesterday after its credit rating was cut to junk by a second major rating agency on liquidity concerns.

The stock tumbled by as much as 10.1 per cent in early trade before paring much of the losses to close half a cent or 1.5 per cent down at 34 cents.

That slight reprieve still leaves the shares down 15 per cent since Monday, with about $405.8 million wiped off its market capitalisation.

Yesterday's fall came after Standard & Poor's (S&P) downgraded the commodity group's credit rating from BBB- to BB+ on Thursday, less than two weeks after Moody's Investors Services made a similar move.

Noble has been facing an uphill struggle amid a rout in commodity prices that has come on top of attacks on its accounting methods by research outfit Iceberg.

"In our view, the company's credit standing in the capital markets and with lenders has weakened, reflected in its depressed securities prices," said S&P credit analyst Cindy Huang said in a statement. "Given the prospects for a prolonged slump in commodities prices, we expect lenders to take a more cautious view towards financing commodities businesses."

IG market strategist Bernard Aw told The Straits Times that S&P's downgrade does not come as a surprise, given that the group was already put on a negative outlook.

"(The downgrade) might cause Noble's creditors to raise collateral requirements, which would then put additional strain on the group's financials," he noted.

Noble said in a statement on Thursday that the S&P change in its investment grade status is "not expected to have a material impact on the group's operations".

"To date, the increased collateral calls have been immaterial and below the previously indicated range of US$100 to US$200 million (S$287 million)," it added.

"The current low-price environment continues to offer opportunities and plays to our strengths as an asset-light supply chain manager."

Noble also reiterated that its rating metrics will "substantially exceed those required of an investment-grade credit" once the proposed Noble Agri deal closes, likely before the end of next month.

The group agreed last month to sell its remaining 49 per cent stake in its agriculture unit to China's Cofco Corp for at least US$750 million as part of efforts to cut debt.

However, the downturn in the commodity sector - which is likely to see little respite in the coming quarters - could add further strain on Noble's financials, said Mr Aw. "If they're able to keep costs in check, they may be able to weather the storm. Otherwise, they may have to raise more funds, which could further weaken their credit profile."

While Fitch Ratings said that Noble's collateral requirements are manageable given its improved liquidity following asset sales, it also said that "any significant increase in collateral needs or funding costs could result in negative rating action".

OCBC Investment Research said in a note that it maintains a "hold" call on the stock, although it had earlier pared its fair value from 54 cents to 44 cents.

Noble said in a statement on Thursday that the S&P change in its investment grade status is "not expected to have a material impact on the group's operations".

This article was first published on January 9, 2016.
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