Noble rating cut to ‘junk’ as commodities continue to tumble

PUBLISHED : Wednesday, 30 December, 2015, 8:53pm
UPDATED : Wednesday, 30 December, 2015, 8:53pm

Shares of Asia’s biggest commodities trader by revenue, Noble Group, plunged over 9 per cent after its credit rating was cut to “junk” status by Moody’s, capping a tumultuous year for the firm and the commodities market in general.

The downgrade to junk could raise funding costs for Hong Kong-headquartered Noble, already struggling with its finances.

“The downgrade of Noble’s ratings reflects Moody’s concerns over the company’s liquidity,” said Joe Morrison, a Moody’s senior credit officer, adding it also reflects its low profitability and consistent cash outflow from core operating activities.

“The downgrade also reflects the uncertainty as to whether or not these factors can be improved sustainably and materially, given our expectations of a prolonged commodity down-cycle.”

READ MORE: Noble Group ‘confident’ of meeting Moody’s targets in review

The downgrade came even after Singapore-listed Noble last week inked a deal to sell its remaining 49 per cent stake in its agricultural commodities unit for US$750 million. Noble expects the deal to be completed by February.

Noble shares have this year fallen nearly 65 per cent, reeling from attack after attack by short-sellers as well as precipitous falls in prices of energy, metals and agricultural commodities that it produces, processes and distributes.

Commodities ranging from crude oil, natural gas, coal and industrial to precious metals, corn and soybean have tumbled – by more than half in many cases – partly due to a prolonged economic slowdown in China, the top consumer or importer of many commodities.

Oversupply due to slower demand growth and a production capacity investment binge during earlier boom years is also to blame for a glut.

READ MORE: Noble Group faces ratings downgrade to junk

A rising trend of the US dollar against other currencies has also put pressure on prices since a more expensive dollar makes commodities less affordable to consumers in nations whose currencies are not linked to the greenback.

In February, anonymous blog Iceberg Research attacked Noble’s accounting practices. The company denied the allegations, saying a disgruntled ex-employee was behind the blog. But short-seller Muddy Waters and Hong Kong-based GMT Research also questioned Noble’s books later in the year.

“Whilst we respect Moody’s decision, we are of the firm view that, once the just-announced Noble Agri deal closes, our rating metrics will substantially exceed those required of an investment grade credit,” Noble said in a statement.

“Itis unfortunate that this transaction has seemingly, in our view, been outweighed by Moody’s negative view of the commodity producer segment.”

Standard & Poor’s also has a “BBB-” long-term credit rating on Noble, the lowest of an investment-grade rating, but last month put it under review for three months. Fitch has a “BBB-” long-term rating with a “stable” outlook.

Fitch last week said the agribusiness disposal by Noble will reduce pressure on its tight liquidity position since the company has said it will use the entire proceeds to pay down debt.