The case of Noble Group has stimulated industry participants and investors with mutual interests in commodity markets.
Academics at the National University of Singapore now take part in this effort to constructively address the credit, liquidity and solvency concerns of Asia’s largest commodity trader.
In a recent market research entitled “Noble Group downgraded as large debt payments are on the horizon”, the Risk Management Institute at the NUS analyses the trader from the angle of the probability of default generated by RMI-CRI’s default forecast model.
” An Imbalance between the company’s cash flow and liabilities”
The default risk of Noble Group Ltd (Noble), the largest commodity trader in Asia, rose to an all-time high as a prolonged commodity down-cycle further squeezed its already-low margins and weighed on the imbalance between the company’s cash flow and liabilities.
RMI-CRI 1-year Probability of Default (PD) for Noble Group
The fundamental question is does the RMI-CRI model also incorporates roll-over risk ?
If not, the model could severely underestimate the PD of the commodity trader.
A Quant at the NUS provided an answer to the fundamental question:
“Per your question, our Probability of Default model does not specifically state that it incorporates refinancing risk (rolling over risk), but, in my opinion, the model has already captured that risk. Since PD includes firm-specific inputs, including market cap, leverage, liquidity, profitability and volatility etc. To some degree, the refinancing risk should be captured by the company’s overall liquidity health, gearing profile and market cap (market sentiment). Probability of Default model does not specifically state that it incorporates refinancing risk (rolling over risk), but, in my opinion, the model has already captured that risk. Since PD includes firm-specific inputs, including market cap, leverage, liquidity, profitability and volatility etc. To some degree, the refinancing risk should be captured by the company’s overall liquidity health, gearing profile and market cap (market sentiment)”.
The company has $2.9 billion of debt due by September, including the $1.15 billion portion of a revolving facility due in May. Noble had refinanced this bank line last May at a cheap LIBOR+85BPS without ponying up collateral according to HEARD ON THE STREET-Wall Street Journal. -Jan. 26, 2016
Noble Group’s roll-rover risk
“However, the rating agencies emphasized that any further deterioration of the liquidity position will have a negative impact on rating actions. A further downgrade could be particularly earthshaking for Noble because USD 11bn of its USD 15.5bn banking facilities are uncommitted, indicating that lenders are not obligated to provide financing. Such facilities are commonly contingent on a company’s ability to maintain or improve its credit rating. Moreover, the downgrade will constrain the access of Noble to the capital markets, especially vicious to a commodity trader like Noble, which relies heavily on debt to finance its operations – buying and selling large volumes of coal, oil and other commodities across the globe”. –NUS RMI Jan 14, 2016
which is in line with;
“The total collateral margin call on Noble Group could be as much as $3.4B, banking facilities that are uncommitted and contingent on the ability of maintaining their investment-grade rating”. –Noble’s “Margin Call” Part II – The Enron Moment Jan 10, 2016
“A Working Capital hole”.
The Trends of cash holding and short-term debt shows the the $1.6B “working capital hole” that we previously alluded in Noble Group’s “Collateral Margin Call
The excessive leverage ratio is rooted in the low operating margin (%) profitability of asset-light commodity trading model used by Noble Group. This business model needs a lot of leverage to produce a marginal return and this capital structure remains non-conductive to investment rating methodologies.
The research note concludes with:
“In the short term, Noble might not have imminent liquidity issues; however, as global commodity prices keep dipping into the new lows, the company’s credit quality continues to be under pressure”.
Noble Has De Facto Lost Its Access to the Capital Markets
Noble 1-year CDS up 700 BPS since Jan. Noble Perpetual bonds are currently traded in the 20c on the dollar… This trader has de facto lost their its access to the capital markets.
Those wanting to defend against non-payment over the next five years would have to pay almost US$3.1 million right away for credit-default protection on every US$10 million of Noble’s debt. Lend the same amount to another Asian commodities trader, Mitsui & Co, and you’re betting on debt regarded as so safe that the CDS counterparty has to pay you money, to the tune of about US$29,000.
Noble Group are shut down in the otc swap markets as well, the banks taking into account the CVA (The Credit valuation adjustments for derivative contracts).
Noble seems to be on its own scale.
At the heights of the Mont Blanc.
A paradox is that as long as Noble proves they can open a first class Letter of Credit backed the creditworthiness of a bank, they are let to bid into the Platts Market On Close (MOC), the daily process underpinning billions of dollars in energy commodities.
Does Platts also monitor the credit counterparty risk of physical traders ?
If so, they might want to look at the CDS market, the prompt swap for Noble Group is at 2900 bps.
It raises real questions about Noble’s ability to perform and its credibility in the marketplace.