(Bloomberg) -- Noble Group Ltd.'s sale of its oil business to Vitol Group probably buys the embattled commodity trader time. But even if it survives long enough to complete the deal, there's still an almighty struggle ahead: the near-inevitable restructuring of over $3 billion in debt.
Analysts at BNP Paribas SA, Nomura Holdings Inc., JPMorgan Chase & Co. and iFast Corp. all predicted after the sale was announced on Monday that the Hong Kong-based company would be forced to restructure its debt.
"The next few months will be critical," said Jean-Francois Lambert, a consultant and former head of global commodity trade finance at HSBC Holdings Plc. "The business whilst shrinking is still bleeding and this becomes very worrisome."
Noble Group didn't respond to requests for comment.
The company's bonds extended gains on Tuesday after the trader said the Vitol deal, coupled with the earlier sale of the gas and power business to Mercuria Energy Group, would provide sufficient proceeds to pay down two secured debt facilities. But attention is shifting to the ability of the rump company, focused on coal and iron ore trading in Asia, to service Noble's debt load.
Those prospects don't look especially good: as part of a profit warning on Monday, Noble said its hard commodities business would make net losses of $50 million to $100 million in the third quarter -- the third straight quarter in which the division has been a source of losses.
"Remaining unsecured debt has interest liabilities of above $200 million, which is unlikely to be serviced from the remaining hard commodities business," Varun Ahuja at JPMorgan said in a note on Monday. "We think the restructuring of the remaining business post completion of the oil business is the base case."
He estimates what's left of Noble could make an annual operating profit of no more than $200 million. He expects creditors to recover 53 cents on the dollar based on cash levels as of June 2017 from estimates of 42-57 cents in a liquidation scenario analysis in May.
Noble's January 2020 notes climbed 1.2 cents to 39.9 cents on the dollar as of 4:52 p.m. Hong Kong time, the highest since Oct. 6, according to Bloomberg-compiled prices. Its shares tumbled 4.2 percent to close at 34 Singapore cents, the lowest level since June and bringing this year's losses to 80 percent.
Sale Proceeds
Exactly how much surplus cash Noble will have from the sale of the oil unit and gas and power business is far from clear. On Monday, it said that for "illustrative purposes", had the deals been done immediately after the end of June the company would have received $1.42 billion in aggregate proceeds, and after repayment of $836 million of debt would have been left with $582 million in net proceeds.
Those numbers include proceeds from both the planned sale of the oil business, and also the completed sale of the gas and power business, a Noble spokesperson confirmed by email. The gas and power sale proceeds are based on the consideration paid on closing, plus amounts placed in escrow and cash received by the business prior to the closing date, they said.
Noble received $102 million in cash and a further $83 million paid into an escrow account when it sold its gas and power business to Mercuria at the end of last month.
What's more, the value of the net working capital in the oil business -- the basis for calculating how much Vitol will pay -- is likely to have declined since June as the business was "adversely affected" by capital constraints during the period, according to Noble's statement.
In addition, the company made further impairments on oil deals that were excluded from the Vitol sale.
And not all of the proceeds of the oil sale would be paid immediately: according to the deal with Vitol, $174 million would be paid into three separate escrow accounts. S&P Global Ratings said on Monday that "default risk remains" for Noble as the company's cash balance remains uncertain.
“They have had to batten down the hatches at a bad time when people are speculating about higher oil prices as reserves are low,” said Robert Southey, managing director at Southey Capital Ltd. in London, which trades illiquid and distressed debt. “It leaves them with no or little upside to any oil rebound.”
Creditor Interests
Noble Group has already started talks with lenders under its $1.1 billion revolving credit facility, or RCF, due in May 2018, who have agreed to extend a covenant waiver that was due to expire last week until Dec. 20. That's likely to be the first in a series of key deadlines the company must navigate.
In addition, the company has $379 million in bonds due in March 2018, $1.18 billion in bonds due in 2020 and $750 million in bonds due in 2022, according to data complied by Bloomberg. It also has a $400 million perpetual bond.
Any talks are likely to be complicated by the divergent interests of different sets of creditors.
Banks' exposure is largely through the secured facilities, Lambert said.
"Bankers have been quite amenable, but part of the reason is probably that most of them are exposed to the North American borrowing bases which are likely to get repaid by the sales proceeds," he said.
As many banks have either sold their stake in the RCF or written it down, they are "now looking forward to 2018 with none or little exposure", Lambert said, suggesting they may be less pliant.
Ultimately, even if Noble's recently appointed chairman, restructuring expert Paul Brough, can close the deal with Vitol and reach a deal with Noble's creditors, the company still needs to turn around the performance of its core trading business to survive.
"The company will need to demonstrate in the fourth quarter that the bleeding is over, reassure its key staff and convince everybody that they have a realistic game plan for the future," said Lambert. "Not an easy task."
--With assistance from Denise Wee Lianting Tu David Yong and Jasmine Ng
To contact the reporter on this story: Jack Farchy in London at jfarchy@bloomberg.net.
To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Jake Lloyd-Smith, James Poole
©2017 Bloomberg L.P.
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