• Fitch Affirms Noble Group at 'BBB-'; Outlook Stable

  • Fitch Ratings
    12 May 2015, Hong Kong/Singapore Fitch Ratings has affirmed Noble Group Limited's (Noble Group) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The ratings on all its outstanding senior unsecured notes have also been affirmed at 'BBB-'. The Outlook for the IDR is Stable.The ratings have been affirmed following Noble Group's stable operational performance amid a commodity market recession. The company's balance sheet structure has also improved to levels comparable to similarly rated and higher rated global peers' after selling a 51% stake in Noble Agri International Limited to a consortium led by COFCO (Hong Kong) Limited (COFCO; A-/Stable). Noble's comprehensive risk management process and sustained strong liquidity position continue to support its ratings. KEY RATING DRIVERS
    Operational Stability: Noble Group's business volume (excluding gas & power) continues to expand, as reflected by the sharp 41% quarter-on-quarter increase in 4Q14 trading volume, which was followed by a seasonal decline of 8% in 1Q15. However, revenue declined by 9.5% in 4Q14 and 20.7% in 1Q15, due to a severe decrease in average selling prices. Noble's profit margin improved for three straight quarters to 2.5% in 1Q15 from 1.3% in 2Q14, reflecting both a rising operating profit to USD5 per tonne by 1Q15 from between USD3 and USD4 per tonne in the preceding three quarters, and the fall in selling prices. The improve profitability is a reflection of the effectiveness of Noble's hedging strategies and the diversity of its product profile. Noble has used the proceeds it received from the Noble Agri stake sale to expand its business. Its trading volume has increased to an average of 70.3m tonnes per quarter since the announcement of Noble Agri sales, from a quarterly average of 57.1m tonnes in the preceding eight quarters. Improved Balance Sheet Structure: Noble Group's financial profile has improved following the Noble Agri stake sale, which has helped to strengthen the ratio of its working capital (current assets minus non-debt current liabilities) to total debt (including 50% of perpetual capital securities as debt) to 1.14x at end-3Q14, after it received the full sale proceeds, from 0.86x at end-2Q14. Noble's working capital to total debt ratio was 1.15x and 1.09x at end-1Q15 and end-2014 respectively. Fitch believes that commodity trading and processing companies, especially the ones pursuing an asset light trading strategy, will need to maintain at least 1.0x working capital to total debt ratio to ensure sufficient working capital as liquid assets to cover all their debts. However, higher-rated peers like Archer Daniels Midland Company (A/Stable) and Bunge Limited (BBB/Stable) have higher working capital to total debt ratios of 1.86x and 1.34x respectively. Furthermore, they have a sizeable pool of non-current assets that are productive and their values are larger than their respective current assets. Good Liquidity: Noble Group has strong liquidity that gives it financial flexibility to deal with shocks in the commodity markets. Its available bank facilities of USD12bn at end-1Q15, of which USD4bn is committed, are sufficient to meet large working capital needs arising from any sharp increases in commodity prices. Furthermore, Noble has neutral cash flow from operations (CFO), which totalled negative-USD159m over the seven years from 2008. Over the same period, working capital increased by USD1.87bn, showing that Noble has funded its business expansion almost entirely with operating cash flow. Strong Risk Management: Noble's strong internal risk control can be seen in the average monthly value-at-risk (VaR) of 0.35% of shareholders' equity in 1Q15 and 0.36% in 2014, slightly higher than the 0.34% in 2013. The higher VaR in 2014 was driven by higher 1Q14 average VaR of 0.45% as the company faced volatile US energy market conditions that followed unusually cold weather caused by a polar vortex. This extreme volatility had created opportunities for Noble to improve its margin to 2.9%; the highest quarterly margin it had since 2011. Noble has also put in place stringent counterparty risk management for its off-take agreements. Noble's internal check and balances for its trading activities and the diversified pool of financial institution brokerages it uses for the derivative trades to control counter-party risks are further evidence of its robust risk management process. Adopting Alternative Profitability Measures: Fitch assess Noble's profitability using the ratio of EBITDA to working capital. The rationale for adopting this ratio, and discounting the use of readily marketable inventory-adjusted FFO net leverage as a component of rating sensitivities, will be detailed in a subsequent release by the agency. Please click here for the full document.