March 13, 2017 / 10:06 AM / 2 years ago

Fitch Assigns Noble's USD Notes 'BB+' Final Rating

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, March 13 (Fitch) Fitch Ratings has assigned Noble Group Limited's (Noble, BB+/Stable) USD750m 8.75% notes due 2022 a final rating of 'BB+'. This final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 5 March 2017. KEY RATING DRIVERS Significant Balance Sheet Improvements: Noble's ratio of working capital/total debt, including 50% of its perpetual securities, had improved significantly to a healthy 1.36x by end-2016, from 0.96x at end-2015. This was consistent with our expectations, as the company implemented a number of liquidity-strengthening measures, including the sale of Noble America Energy Solutions (NES) and completion of a rights issue. This ratio is similar to those of investment-grade rated peers. Business Profile Remains Strong: We believe Noble's business profile remains strong - given its global footprint and leading position in a number of key products in core regions. Returns have declined, but annual tonnage volume shipped has remained stable over the last two years at over 220 million tonnes, supporting its underlying business over the long term. Return Improvement Uncertain: Noble's quarterly working-capital return has been below our 3% negative rating trigger since 3Q15, and deteriorated further to an average of 0.7% in 2016. However, the weak EBITDA generation does not reflect Noble's true 2016 return, as it is largely attributed to the sale of NES, a temporary increase in selling, administrative and operating (SAO) expenses due to headcount reduction and rationalisation and capital constraints on business expansion given the company's focus on improving its balance sheet and liquidity. Adjusting for more typical SAO expenses and 11 months of NES's performance prior to disposal, return on working capital is a higher 2%. Fitch believes Noble may be able to deploy more capital to generate returns in 2017 due to its improved liquidity at end-2016. However, it remains uncertain whether the company will be able to sustain high returns in the difficult operating environment. Negative Operating Cash Flow: Noble's cash flow from operations (CFO) has been negative since 2014, which breaches one of Fitch's negative rating triggers. The main reason for negative CFO in 2015-2016 was lower accounts payable, which we believe was due to credit-related events in 2015 and 1Q16 that reduced vendor and bank credit lines. This effect was diminished in 2H16, which was evident in improved CFO to USD56 million in 4Q16n from negative USD486 million in 1Q16, helped by a USD226 million accounts payable increase, compared with falls in previous quarters. We do not expect a further decline in Noble's accounts payable in 2017, but it remains uncertain as to whether the improved CFO on a quarterly basis in 2016 can be sustained into 2017 and beyond, as it can be affected by the company's decision to increase working capital to drive profitability. Limited Secured Debt: Noble's secured debt as a percentage of total debt is low, at around 13% at end-2016. Noble's management indicated that the company intends to use more borrowing-based facilities to finance working capital, in particular by issuing letters of credit, rather than using secured debt drawdowns. A significant increase in secured debt could lower the company's unencumbered assets relative to unsecured debt, which may result in its senior unsecured rating being notched down from its IDR. DERIVATION SUMMARY Noble's operational scope is in line with large international traders with global reach, but its scale is smaller than that of its investment-grade rated peers, such as Cargill Incorporated (A/Stable), Archer Daniels Midland Company (A/Stable) and Bunge Limited (BBB/Stable). Its debt structure is heavier on short-term debt compared with that of investment-grade rated peers given its asset-light strategy. Noble's balance sheet is strong and in line with investment-grade rated peers, but it has weaker profit-generation ability. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Sales volume to remain similar to 2016 levels. - Capex and business acquisitions of USD100 million a year. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action: - The company reverting to more longer-term and competitively priced funding on a sustained basis Developments that May, Individually or Collectively, Lead to Negative Rating Action: - Sustained weakening of EBITDA/working capital below 12% (or quarterly EBITDA/working capital below 3%). - Sustained negative cash flow from operations. - Working capital/total debt sustained below 1.0x. - Liquidity position, as defined by unrestricted cash and cash equivalent plus undrawn committed facilities, to total inventory sustained below 1.0x (2016: 1.3x). - Weakened business strength evident from lower funding capacity to support working-capital expansion over the cycle; sustained decline in tonnage volume that is more severe than industry performance; and evidence of a weaker risk management process. - Senior unsecured ratings might be notched down if there is insufficient coverage of unsecured debt by unencumbered assets. LIQUIDITY Noble's liquidity at end-2016 stood at USD2.0 billion and consisted of USD1.1 billion of unrestricted cash and equivalents and USD943 million of undrawn committed facilities. This compared with liquidity of only USD868 million at end-June 2016. Current liquidity is equivalent to close to 1.3x inventory, which we believe is sufficient to cover requirements arising from reasonable commodity price increases. Contact: Primary Analyst Laura Zhai Director +852 2263 9974 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Renee Lam Director +852 2263 9971 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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