Noble Group Limited:Where to from here?
Extension of covenant waiver from RCF lenders.
Cash balance as at Sep 30, stood at USD339 million, of which USD77 millionwas restricted with futures brokers, implying just USD262 million in free cash.
Goldilocks Investment increases stake from 1.18% to 5.03%.
The existing waiver should be expiring soon, around mid-October. Withperformance unlikely to improve in the near term, further waivers might berequired. We expect RCF lenders to play ball and the company to announce anextension soon. We do acknowledge that the composition of lenders has likelychanged with more hedge funds getting involved, however don't see anyincentive for any lender to make the situation more difficult for Noble.
The sharp decline during the quarter was mainly caused by repayment of someBBFs. Interestingly, there was also an outflow of USD161 million of cash withfutures brokers for the sale of NAGP to Mercuria vs. USD102 million received.
Goldilocks is an ~USD350 million fund with "constructive activism" as itsstated strategy. It is a subsidiary of the Abu Dhabi Financial Group, which has~USD5 billion in AUM, in addition to other businesses like real estate, etc.
Separately, this also means that the RCF holders are perhaps still pushing toget secured, though we assume the management is sticking to its earlierstance of not giving any preferential treatment to any group of unsecuredcreditors.
Separately, of the existing cash balance, only USD76 million sits at the holdco,though we assume it won't be difficult for Noble to take cash out fromsubsidiaries, albeit some of these might be jurisdictions like China. Plus,additional vessel debt of USD65 million has been taken over as the companyacquired one of the JVs, taking total vessel debt to USD126 million, but thisshould be covered by the value of underlying vessels.
Goldilocks seems to be a relatively new fund with a 2 year history, so wehaven't managed to find any examples of their strategy implementation. Thereis a chance they turn out to be pure financial investors and the credit marketsare right to ignore the news, as has been the case this morning. We noteNoble still has a market cap of around USD500 million while its bonds aretrading in 30s. However, as we try to get more information, we won't rule outthe possibility of Goldilocks playing a more strategic / active role.
Results to be announced in early / mid November.
Looking ahead into the next couple of quarters before the 2018s mature inMarch, the USD83 million sitting in escrow with Mercuria should come in(management guided this should happen near term). As for the sale of the oilbusiness to Vitol, we estimate the proforma number at USD400 million asfollows: USD202 million in base consideration as announced + USD829 millionin net working capital (per MDA statement, assuming this doesn't includecash) + USD185 million of cash balance – USD636 million debt – USD180million for escrow and insurance.
Other news have also been more positive than negative.
While no one expects underlying operations to improve, the key focus will bedegree of cash burn. An unchanged or only slightly lower cash balance couldsurprise investors positively. We do foresee free cash to decline from theUSD635 million at June 30, given USD80 million in just coupon paymentssince then. However, the decline shouldn't be material in our view as workingcapital could have been released with shrinking businesses. If true, this releasemight also have been used to repay some of the BBFs, which could come inlower than the USD1 billion odd number last reported. Note that in the lastquarter, Noble's operating cash flow was negative ~USD500 million.
As for underlying Asia operations, if we take roughly the same adjustedEBITDA as 3Q (negative USD40 million) for the next couple of quarters, interestoutgo of USD50 million per quarter and no working capital changes, Noblecould lose around USD180 million in cash. We derive 3Q EBITDA by adding allof the ~USD30 million depreciation & amortization to adjusted gross loss ofUSD7 million and deducting USD63 million of SGA expenses. Note that 3QOCF (pre-interest expense) of positive USD322 million hasn’t been brokendown into continuing vs. discontinued businesses, though most of this wasdriven by working capital inflows of USD508 million in the oil& gas operations.
These range from the US BBF extension till October, company'sannouncement on potential asset sales, continued talks with strategicinvestors and constructive dialogue with bank lenders despite appointment oflegal & financial advisors to deferral of perp coupon (at least positive for seniordebt). In fact, Debtwire reported yesterday that Noble is still in talks withSinochem, and that the unsecured RCF lenders are not asking for any pledgesand might wave any possible covenant breaches. Even with all this, the seniorbonds are almost unchanged. It feels investors have almost resigned to thefate of an eventual restructuring. Separately, there is the likelihood of CDSgetting triggered, though we believe this should have minimal direct impact onthe bonds.
Sale of US oil business.
On other asset sales, we think it won't be easy to monetize the stakes inJamalco and Harbor Energy in the next 3-6 months. However, sale of stake invarious listed companies could fetch USD50-100 million (say USD75 million forour calculations). We also believe any recapitalization of the Asia businesswon’t happen without a simultaneous debt restructuring.
Our view - Not much change.
Company expects to complete this by end Dec as we know. Assumingregulatory approvals take the same time as the gas and power sale (i.e. justover 2 months), announcement on the oil sale could be made by end October /early November. Another key factor will be surplus proceeds realized fromthese two asset sales after paying off the BBFs. We were a bit disappointedwith the final sale number for gas and power coming lower than initialexpectation (USD185 million vs USD248 million), albeit this was mainly to dowith M2M positions and working capital adjustments. With Bloombergrecently reporting that bids for the oil entity are "slightly" under USD1 billion,we don't expect surplus to be meaningful. In our possible restructuringscenarios published on Aug 10, we assumed a surplus of USD100-200 million.
Adding everything up, cash balance could stand at approx. USD640 million atthe end of March. As is evident, we have made a number of assumptions inthis analysis. One could argue this cash will be sufficient to pay USD379million of the 2018s, but the RCF lenders are unlikely to allow that in our view.
While hard to rule out a restructuring, we are still more hopeful thanconsensus, at least in the near term. We don't see an immediate risk ofbankruptcy, though the longer term hope of survival remains pinned on astrategic investor. Two things will govern the length of this window - size ofasset sales and the pace of cash burn in the core business. On former, we hadexplored the potential assets that can be sold in more detail in our report onMay 19 where we estimated USD400-500 million can be raised even withoutselling the core US oil business and the derivative book. On latter, we areexpecting the burn to slow in 2Q vs. 1Q, albeit complete picture will only beclear once results are out in mid/end August. Recollect that Noble's proformacash balance at the end of Mar 31 was USD600-700 million and OCF in 1Qwas negative at around USD300 million. It will also be worth watching if salesvolumes have declined materially, a reflection of customer/supplier confidence.
Can the 2018s get par.
Covenant waiver from them expires on Dec 20 next month, which is the nextkey event to watch (other than the final proceeds to be received from Vitol).
Bonds - Prefer perps to straights.
As the earliest maturing debt after the BBFs and their relatively smalloutstanding at USD379 million, there is a small camp that believes the 2018scould get par. Stars will need to be really aligned for this to happen. The twokey constraints we see are availability of cash and approval from the RCFs.
As highlighted in our 2H Outlook report, with almost all the assets & liabilitiessitting at subsidiaries, recovery on bonds in the event of liquidation will dependon the status of ~USD4 billion in (net) loans given by the holdco to opcos. Andit's quite likely that the recovery on straights (Hold) is NOT much higher thanthe perps. Hence, we prefer the perps (Buy, 17 offer) as a lower cost option.
Given cash burn and lack of meaningful surplus from US asset sale, it isunlikely Noble will have sufficient cash in March to pay off the 2018s and haveenough left to run the business. Even if it does, the RCFs maturing in Maymight not approve 2018s getting par. Hence, we assign a low probability tothis event, say 25%. Note that the other asset sales (outside US) that Nobleexpects to generate USD800 million - USD1 billion will take time and we don'texpect them to close in the next 3-6 months.
Just by way of reference, Ballarpur Paper perps are quoted around 30 (perBloomberg), having deferred coupons and defaulting on debt.