(Bloomberg) -- Noble Group Ltd. is talking to creditors about a conventional restructuring that includes a debt-for-equity swap, according to people familiar with the negotiations, a move that represents a change of tack as the commodities trader fights for survival. The shares extended their surge.
After meetings in Hong Kong last week, the company is expecting a proposal from its creditors to restructure $3.5 billion in debt, including a major debt-for-equity element, the people said, asking not to be identified discussing private talks. Depending on its size, the swap could wipe out a significant portion of the shareholdings of current investors.
Although a deal is some way off, this is a departure from Noble’s original proposal, which involved exchanging current debt, including bonds and a revolving credit facility, for new maturities without a haircut on the face value and initially preserving all the equity of the current owners. In that plan, the new debt would have come in three types: bonds supported by cash flows from Noble Group’s Asian coal and iron ore business, an asset-backed bond secured against other physical assets, and a mandatory convertible bond.
Under the new plan, the company will retain some key elements of its opening gambit, including debt supported by cash flows from its Asian business plus the asset-backed bond. But the balance would be through a classic debt-for-equity deal, the traditional way for companies to reshuffle borrowings.
The company’s shares jumped as much as 26 percent on Wednesday to 24 Singapore cents before closing at 21 cents. They have gained more than 60 percent this week, the biggest three-day increase since June, after finishing at the lowest level in almost 20 years on Friday.
A spokeswoman for Noble declined to comment.
“As a bondholder, you ideally would not want to be converted into equity as you are of course lower on the capital structure,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “At this point, it could be a negotiating tactic on the part of Noble. Restructuring is in some ways a game of poker where each side tests each other’s resolve.”
The negotiations are continuing, and the people said that new developments in the restructuring process could occur before a deal is reached. Noble Group and its creditors have yet to agree on how much the current shareholders would retain in the new company, and how much would be controlled by management as part of an incentive package. The company has a market value of about $200 million, compared with total net debt of $3.5 billion, suggesting a significant risk to current shareholders under a debt-for-equity scenario.
The discussions are expected to carry over into early January, one of the people familiar with the conversations said, describing a debt-for-equity swap as a positive step. If the plan works, it could save Noble Group, albeit at the expense of its current shareholders and resulting in a much smaller company. Another person familiar with the talks cautioned that creditors and the company weren’t close to a deal.
Richard Elman, the veteran commodities trader who founded Noble, is the largest shareholder, controlling almost 20 percent of the stock. China Investment Corp., the sovereign-wealth fund, is also a major shareholder at just under 10 percent, according to data compiled by Bloomberg.
As talks continue, Noble Group has agreed retention bonuses with its senior executives and traders until the end of next year, according to people familiar with the matter. The retention packages are payable December 2018 and include claw-back clauses, the same people said.
Approval of this restructuring could “buy some time” for the company, said Nicholas Teo, a trading strategist at KGI Securities (Singapore) Pte. “It probably won’t make existing shareholders too happy because it’s dilution, but again, I also balance that by saying, what choice do shareholders have?”
While Noble shares have surged this week, they’re down 88 percent this year. The bonds due in 2020 dropped 1.3 cents to 37.4 cents by 5:19 p.m. in Hong Kong, while the securities due in 2018 fell 0.5 cent to 47.9 cents.
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