LDN - Business

At 'bare bones' Noble Group, staff exits and debt pose more risks

[July 28, 2017] By Anshuman Daga and Henning Gloystein

SINGAPORE (Reuters) - Noble Group is slimming down drastically to its core Asian coal-trading business, but that may not be enough to revive its fortunes due to a staff exodus, shrunken balance sheet and debts of more than $3 billion, analysts and industry sources say.

Once Asia's largest commodities trading house, Singapore-listed Noble is a shadow of what it was during the boom years, when it snapped up assets from sugar mills to coal mines and expanded globally to rival Glencore and Trafigura.

In a dramatic overhaul announced on Wednesday, it sold its U.S. gas and power business to a Swiss-based peer, Mercuria Energy Group, for $248 million, started a process to sell its oils liquids unit and announced plans for up to $1 billion of disposals over the next two years.

It also flagged a $1.3 billion writedown, leading to a quarterly loss of up to $1.8 billion on a "more conservative balance sheet valuation".

"You are essentially getting back to a contract book that's worth $1.2 billion and meanwhile you have debt at $3.3 billion. So that's clearly not sustainable," said Andy DeVries, New York-based analyst at CreditSights, an independent research firm.

"You can't asset sale your way out of this. You can't grow the earnings out of this. You need a change in the capital structure. It's essential."

Sources close to the company and investors said the business remains hemmed in by financing constraints - a major issue for trading houses - and has lost many traders, analysts and managers over the past months, despite cash offers to keep key staff until December.

Recruiters cite high-profile departures, including veterans in Noble's U.S. aluminum business.

Other exits include the company's head of the quantitative strategists team, who confirmed he left Singapore last week to return to his native Iceland.

Its head of forex and rates left after an eight-year stint and its Asia treasury chief quit.

Noble's chief iron ore analyst, Gueorgui Pirinski, joined rival Rio Tinto <RIO.AX> in May.

Noble declined to comment for this story.

Commodity trading is a "people business" and relies heavily on the contacts and expertise of its traders and analysts.

"In theory, Noble had a very large oil trading business that was worth a lot of money," said CreditSights' DeVries. "In reality, they lost most of the key traders in that business. It is very bare bones and they are selling the remaining bones."

RED OCTOBER

Noble was thrust into the spotlight in February 2015 when previously obscure Iceberg Research accused it of overstating its assets by billions of dollars, which Noble rejected. In 2015, consultants PricewaterhouseCoopers found Noble had complied with international accounting rules.

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An employee is reflected on the wall as she walks past a signage of Noble Resources, a Noble Group subsidiary, at their premises in Singapore March 6, 2015. REUTERS/Edgar Su/File Photo

But as far back as January 2016, Noble's founder and then chairman, Richard Elman, told Reuters in an interview that the firm needed "to go back to being modest and cautious and economical".

After Wednesday, the company's latest overhaul, its shares slid by nearly 49 percent, valuing the group at less than $400 million - far below its $10 billion peak. The stock has slumped 75 percent this year.

A representative of Iceberg told Reuters: "Noble is facing the perfect storm for a trader - prohibitive cost of funding, both counterparties and banks are cutting their exposure, many traders have left. It is simply not possible to get out of this hole."

Noble's key 2020 bond also fell, trading down half a point at 32.5/36.25 cents on the dollar. The latest bond, issued in March and due in 2022, has slumped to 32.9/35.55 - less than a third of its value in little over 4 months.

S&P Global Ratings in May cut Noble's corporate credit ratings to junk status, warning of a default.

Analysts expect Noble's latest plan to mark the prelude to talks with bondholders.

"On one hand the asset sales can arrest an immediate liquidity crunch, but on the other hand it means that the large chunk of the core business will be gone," said Chris Park, an analyst at Moody's.

"The question is if it can service its remaining debt even if it can reduce the short term liquidity issues."

Last month, Noble extended a key debt deadline to Oct. 20, providing a lifeline to the company, and it said on Wednesday it was in still talking with banks.

Previously a large player in metals, agriculture, oil, natural gas, iron ore and coal, market participants say Noble has for months been largely reduced to trading physical coal supply contracts it has with customers, including deals to ship thermal coal from Indonesia's Kalimantan to clients in North Asia.

While other merchants, including its bigger European rival Glencore, have recovered from the 2015/2016 commodities slump, Noble's decline has been steep. But it woes do not appear to pose a wider risk of contagion to the sector.

"They are virtually absent from physical oil or liquefied natural gas. The capital requirements for them are just too high, and the counterparty risk to engage with them is too high for us," said one energy trader who used to regularly deal with Noble.

"It's sad to see. The market lost a major participant, and I know guys there. It's not an easy situation for them to be in."

(Reporting by Anshuman Daga, Henning Gloystein in SINGAPORE and Umesh Desai in HONG KONG; Editing by Clara Ferreira Marques and Alex Richardson)

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