Noble's Perpetual Betrayal Holds Key to Its Survival
(Bloomberg Gadfly) -- How do you turn a $3.45 billion debt into $1.86 billion? It just takes a little alchemy.
The restructuring of Noble Group Ltd.'s liabilities announced late Monday relies on some reliable old transmutations: converting interest owed into debt, debt into equity, and equity into cash.
To transform interest into debt, you can rely on payment in kind. Some $585 million of the $2.5 billion interest that will come due on its new senior debt facilities is payable this way -- meaning that if cash isn't on hand, the amount is simply added to the principal to be dealt with later.
That's probably a useful expedient for Noble, given how tight cash is going to be in the immediate future -- but it means that debt could increase sharply over the years ahead. The $270 million owed on the bond to be taken out by its New Trading Hold Co. will more than double to $580 million over its seven-year term if the company opts to pay in kind.
Debt-to-equity is the typical core of a restructuring agreement, and there's plenty of that to go round, too. Senior creditors get 70 percent of the company, with existing shareholders taking just 10 percent. Based on Noble's latest market capitalization of S$345 million ($263 million), the shareholders will be left with just a third of a percent or so of the S$9.82 billion equity value in 2014 before the commodity trader began its terminal slide.
Another 20 percent goes direct to management, although half of that amount must be surrendered to the senior creditors if the company doesn't earn back its agreed equity value within five years.
Finally, there's equity into cash. The shape of the restructuring agreement makes clear that the choicest cuts left on Noble's carcass aren't in its once-vaunted trading operations, but in a grab-bag of physical assets that Chairman Paul Brough is already planning to sell.
While creditors are happy to make do with 70 percent of the trading company, they want 90 percent of this group of businesses, comprising energy investment company Harbour Energy Ltd., the Jamalco alumina plant, nine ships and a group of palm oil plantations in the Indonesian portion of New Guinea. Net assets in those four buckets came to $859 million at the end of September, according to Noble, so they should be worth a healthy pile of cash if converted anywhere close to book value.
There are two major hurdles to pulling off this transformation.
One is the question of whether Noble can hit its earnings potential. Annual head office and trading costs will come to about $100 million a year once the dust on the restructuring settles next year, according to a presentation Monday, and roughly the same amount is likely to be going out the door in cash interest from the start, rising with each passing year.
That doesn't leave a lot of wiggle room if the company fails to hit a target of $275 million to $300 million in operating income from its supply chains, particularly as maturity dates approach.
The bigger risk comes sooner. The entire agreement depends on holders of Noble's $400 million in perpetual securities exchanging what they're owed for just $15 million. That's a uniquely raw deal, equivalent to just 3.75 cents on the dollar for securities that were trading north of 87 cents within the last 12 months, and which ought to outrank the equity-holders who are getting 10 cents on the dollar.
The agreement will stand and fall on whether holders of those securities decide that being made the sacrificial lamb to save the company is better than being wiped out. With such a tiny sum at stake, it can't be taken for granted that self-interest will win out over a sense of betrayal.
The fate of Noble Group, whose enterprise value once topped S$20 billion, could turn on the disposal of a mere $15 million. The endgame is only just beginning.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
Coupons on the million New Trading Co. bond will average around million a year and another million or so would be payable on a fully-drawn million trade finance and hedging facility, assuming a percent interest rate in line with the discounts at which slices of Noble's previous revolving facilities are reported to have been trading. Another million a year would go in interest on the million New Trading Hold Co. bond in the first months, rising to million a year after that.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.
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