Noble may be cut to junk status as liquidity woes mount: S&P

It needs to raise US$500m in three months.

Asia’s largest commodity trader is at risk of losing its investment grade status on back of mounting liquidity concerns, according to a report by S&P.

S&P said that it will downgrade Noble to junk status if its liquidity and financial leverage does not improve in three months, or by February 2016.

The report highlighted that Noble’s liquidity and financial leverage have weakened considerably and have breached levels that are considered appropriate for its investment grade rating.

“Noble's liquidity deteriorated in the third quarter of 2015 following a 27% decline in the company's net available readily marketable inventory to US$1.48 billion as of September 2015 from US$2.0 billion in June 2015. The deterioration was largely related to the fall in commodities prices,” S&P said.

Further, Noble’s available and undrawn committed credit lines fell almost 50% to about US$1 billion in Q3, while the company’s cash sources are less than 1.5x cash uses as of September 2015, below the threshold for a "strong" liquidity assessment.

S&P also highlighted that Noble’s financial leverage is weak, with the company’s ratio of funds from operations to debt at 19.8% as of September 2015, down from 24% in March this year.

S&P noted that if Noble were able to raise at least US$500 million in capital to offset its outstanding debt, the ratio of FFO to debt could improve to about 22%.

“In our view, the company's cash flow and earnings visibility are poor amid a challenging market. We believe the Noble management's commitment to raise at least US$500 million in new capital could help restore the company's liquidity position and financial leverage, which will be key to maintaining the current rating,” S&P said.

The company might also be downgraded if its trading risk position weakens, as indicated by increases in fair value relating to long-term commodity offtake contracts, concentration risk of counterparties, or lower cash realization of commodity contracts than the company expects.

“We will review Noble's liquidity trends and financial leverage to see if the company's capital-raising and cost-cutting measures are adequate to weather the heightened volatility in the global commodities market,” the report noted.