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Coal trader Noble Group reports US$ 1.6b loss; S&P downgrades credit rating
View(s):Hong Kong based commodity trader Noble Group’s long-term corporate credit rating has been downgraded by ratings agency Standard & Poor’s (S&P) to ‘BB-’ from ‘BB+’ with a negative outlook. Noble Group’s wholly-owned subsidiary, Noble Resources International Pte., is involved in a controversial lucrative coal tender in Sri Lanka. Noble Group, founded by current Chairman Richard Elman, reported this week a loss of US$ 1.67 billion (Rs 144.2 billion) for 2015.
It reported net debt of US$ 2.26 billion. Noble Group foresees US$ 55 per ton for thermal coal, “to ensure that our contracts will be covered against a possible scenario of lower prices for longer”. This pricing is US$ 14 per ton below the average market consensus price,’’ the company reported this week.
The company says its “energy coal business is a leading global franchise’’ and adds that while the market “is experiencing a sustained downturn, our business remains strong and is positioned for further growth’’. Global coal prices have more than halved since 2011. Prices of thermal coal from Australia, which averaged US$ 70.9 a metric tonne in 2014, are forecast to fall to US$ 64, Bloomberg data citing analysts, show. US thermal coal prices will average US$ 54.54 a ton in 2015, down by 5.2% from US$ 57.54 in 2014, Bloomberg predicts.
S&P Credit Analyst Cindy Huang said in a statement, Noble Group was downgraded because of the company’s volatile earnings and high trade risk position, as reflected in its large marked-to-market loss in 2015. The loss weakens Noble’s credit standing and relationship with banks, despite near-term refinancing risk remaining manageable, she noted. S&P also announced that long-term issue rating on Noble Group’s outstanding senior unsecured notes was lowered to to ‘B+’ from ‘BB’.
In addition, S&P lowered its long-term Greater China regional scale rating on the company to ‘cnBB’ from ‘cnBBB’ and on the notes to ‘cnBB-’ from ‘cnBB+’. The ratings agency said the corporate credit and issue ratings on Noble Group has been removed from credit watch, where they were placed with negative implications on November 23, last year.
The unexpected loss it reported highlights the limited visibility and transparency around Noble’s earnings, S&P says, adding that the company’s profitability is highly volatile, given its complex physical contracts book and derivatives program.
Noble’s trading position is higher than had been previously anticipated due to the unexpected asset impairment. The company has significant long-dated contracts that are not fully hedgeable and the value of which relies on input assumptions that are not market-observable, S&P cautions.
S&P warns that further asset impairments, cannot be ruled out, given the depressed commodity prices. The company’s credit standing and banking relationships have weakened, S&P says. Recent negative developments weaken the company’s position in its discussions with banks and could affect financing terms, the agency says.
However, Noble’s short-term liquidity risk appears manageable. S&P says the company is understood to have made progress in discussions with banks on refinancing its short-term credit facility due in May 2016.
Recent negative developments are likely to weaken Noble’s operations, S&P cautions. In particular, the company’s funding cost may increase and its trading terms with counterparties may become less favourable. These could result in declining profit margin, and a lower market share or competitive position for the company, S&P reports.
Noble recently lost a bid for a lucrative tender to import coal for Sri Lanka’s Lakvijaya coal power plant in Norochcholai. The contract was given to another company named Swiss Singapore Overseas Enterprise (Pte) Ltd. Noble, which held a monopoly on coal supply to Sri Lanka ever since the Lakvijaya plant commenced operations, has challenged the award in court.