ASIA CREDIT-Noble Group credit hurt by high debt, cash flows

HONG KONG, May 16 (Reuters) - Commodity trader Noble Group posted record quarterly sales and solid profit growth, but its latest results have not excited credit analysts who are more worried about cash flow and high levels of debt.

Last week, the firm said revenues rose 47 percent to a record $4.1 billion and net profit jumped 25 percent gain. The firm's shares have been rising steadily all year and currently trade just off record levels.

But that has not erased debt market concerns about the credit profile of Asia's largest commodity trader. In the past week, Noble's bond spreads have widened and its debt has become more expensive to insure.

"We are concerned about the cash flows in the near term," said Mark Lo, a credit analyst at BNP Paribas. "We don't see upside for bonds at this point in time."

He said Noble's debt-to-EBITDA ratio of about 6 was high compared to other BB-rated peers, which S&P says have a median ratio of 3.5.

The company trades in a wide range of commodities including metals, minerals and coffee and competes with the likes of Cargill Inc. of the United States and Japan's Mitsui & Co. . It has moved into oil markets.

Noble's credit profile received a further setback after the company placed convertible bonds on Tuesday worth $200 million, which analysts felt had a generous credit element.

The zero coupon convertible bond, sold at par, has a put price of 126.186 percent at the end of the fourth year, which would give a yield-to-put of 5.90 percent.

The company reported a net cash outflow of $149.8 million in the first quarter and an increase of $308 million in its short-term and long-term debt. BNP's Lo does not expect the cash flow to turn positive in the current year.

Noble said the higher debt reflected the company's increased working capital requirements and capital expenditure.

"While they are using more debt to pay for their working capital and acquisitions, they are still using more cash than they can make at this point," said Oon Jin Ch'ng, credit strategist at HSBC.

"So their credit performance is not improving as fast."

STRATEGY

Noble has recently begun building or acquiring assets as part of what it calls its pipeline strategy.

It has acquired a sugar mill and an ethanol plant in Brazil and purchased soybean crushing plants in China, aiming to profit from every point of its supply chain.

But analysts are nervous because the company has not outlined the exact nature of planned acquisitions in its bid to improve profitability. They are also concerned that there could be additional debt.

"They still have $600 million of cash in their balance sheet, including a large part of funds raised from their bond issue, but there are no clearly identified investments to deploy the cash," said Dilip Parameswaran, Asia credit research head at Calyon Corporate and Investment Bank.

"This also creates some future investment and execution risk."

Calyon has an underperform recommendation on Noble's 2015 bonds, whose spreads have widened by nearly 10 basis points (bps) to 280 bps over U.S. Treasuries since the results were announced.

Noble's 3-year credit default swaps -- insurance-like contracts that protect against defaults and restructuring -- have widened by a similar margin to 100/130 bps.

"We have a neutral recommendation because under higher financial leverage their rating will come under pressure in the next 12 months if they are not able to improve their credit profile," said HSBC's Ch'ng.

Lehman Brothers considers the current spread levels fair given Noble's high leverage, low margins and acquisition risks.

Copyright © 2007 Reuters Limited. All rights reserved. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of Reuters Limited

Copyright © 2007 Yahoo! Singapore Pte. Ltd. (Co. Reg. No. 199700735D). All Rights Reserved.
Privacy Policy - Terms of Service - Community - Help