Noble Group 01 (May 08 - May 10)

[millionairemind]

May 26, 2010, 5.19 pm (Singapore time)

Fitch revises Noble's outlook to positive; ratings 'BBB-'
By ANGELA TAN

SINGAPORE - Fitch Ratings has revised the outlook on Noble Group Ltd's (Noble) long-term foreign currency Issuer Default Rating (IDR) to positive from stable, and has affirmed the IDR and senior unsecured rating at 'BBB-'.

'The Outlook revision is driven by Fitch's opinion that Noble's capex and investments in supply chain infrastructure, totalling US$2.3 billion in the last three financial years, has placed it on track for potential expansion in scale of operations and increased gross profit generation which may be more in line with its 'BBB'-rated peers,' says Siew Huey Loong, Director in Fitch's Asia-Pacific Corporate Ratings team.

Noble has demonstrated a track record of growth and balance sheet resilience through commodity cycles. Despite the economic slowdown in 2009, Noble's tonnage volume increased further by 27 per cent to 180 million tonnes, on top of the 10 per cent increase in 2008. The more difficult operating environment, however, resulted in a fall in 2009 gross profit to US$1.2 billion from US$1.4 billion the year before but Fitch notes that this level is much higher than the US$843 million achieved in 2007, when markets were better, demonstrating the significant growth achieved by the company.

Apart from the scale of its operations, Noble's ratings are also constrained by the inherent volatility of the commodity markets, leading to fluctuations in gross profits for individual product segments and overall working capital needs.

However, Noble continues to exhibit good liquidity and risk management practices - as expanded below - to mitigate the inherent volatility in its business. The company's growth in recent years was achieved without any discernable deviations from these practices.

Despite difficult market conditions in 2009, Noble raised approximately a total of US$5.0 billion in new debt and equity from a variety of sources. As at end-Q110, Noble had increased committed and uncommitted facilities to US$9.3 billion from US$6.1 billion year-on-year. Out of this amount, undrawn facilities stood at US$5.8 billion, giving the company a strong liquidity cushion in the event that commodity prices and/or volumes increase. Moreover, the company's debt maturity profile as at end FY09 was conservatively structured with 73 per cent and 30 per cent of debt maturing after two and five years, respectively. In addition, in Q409, Noble boosted its permanent capital by placing out US$650 millio of new shares to China Investment Corporation. Noble's balance sheet is well structured with short-term debt funding only working capital needs.

Long-term assets are funded entirely by long-term liabilities and equity, with the latter providing a 2.4 times (x) coverage of the former at end-Q110, even when the agency conservatively assumes that all unrestricted cash will be used to fund further long-term asset purchases.

These factors should to a large degree insulate the company from any sudden freeze in capital markets.

In managing its inventory, which constitutes the bulk of its working capital, Noble takes minimal volume risk while price risk is hedged through forward sales to end customers or by taking appropriate positions on liquid futures exchanges and over-the-counter (OTC) markets.

This is reflected by the low VAR as a percentage of equity figures of 0.48 per cent to 1.25 per cent in FY09 (FY08: 1.35 per cent to 2.19 per cent), though the FY09 year end number was bolstered by the equity infusion in Q409. The price-hedged inventories are treated by the company as readily marketable inventories (RMI), and for nine consecutive quarters beginning Q108, RMI has been maintained at above 90 per cent of total inventories. As a result, Noble's RMI-adjusted net leverage - a measure that excludes debt taken on to fund RMI - has been maintained at close to zero (0.2x in LTM Q110, 0.0x in FY09 and -0.1x in FY08) though Fitch notes that any sharp increase in commodity prices will likely increase leverage. Noble also manages its counterparty credit risk through the use of letters of credit, backed by cash goods and prepayments, or insurance. Therefore impairment of trade receivables as a percentage of revenue continued to be low at less than 0.1 per cent in FY09.

Following the Outlook revision, Noble's ratings may be upgraded if the company continues on its growth trajectory while sustaining its liquidity and risk management practices in line with FY08 and FY09, as detailed in the above paragraphs.