Noble Group Ltd., the embattled commodity trader, is working on its largest ever loan backed by inventories as banks demand more security, forcing a dramatic overhaul in the way it borrows.
The Hong Kong-based company is seeking $2.5 billion in a so-called borrowing base facility guaranteed by oil, with the potential to increase the final size to $3.25 billion if commodity prices rise over the next year, according to people familiar with the deal who asked not to be named because the talks are private.
The financing, already employed by most of Noble’s competitors, signals that banks are still willing to support the junk-rated commodities trader, but they’re tightening the leash by demanding guarantees. Also, the use of secure financing means existing bondholders and lenders may see themselves relegated in potential claims.
Noble previously relied mostly on unsecured loans, with just a small $450 million secured loan backed with oil stored in the U.S. This secured loan was increased to $1.1 billion last year. The new one-year borrowing base facility refinances the existing borrowing base of $1.1 billion and adds another so-called standby letter-of-credit facility also worth $1.1 billion, some of the people said. Mitsubishi UFJ Financial Group is the the lead arranger.
Noble declined to comment on its borrowing plans.
Noble, which started marketing the loans to other lenders in New York this week, is offering to pay a rate starting at 1.6 percentage points more than the London interbank offered rate, the same people said. The margin is the highest for any one-year loan Noble has raised since at least 2009 and double the 0.85 percentage point spread Noble paid last year for a smaller secured loan. Still, the margins offered are the lowest for any company rated BB- in the past year, according to Bloomberg data.
At the same time, Noble is still seeking to refinance a $1.2 billion revolving credit facility, according to people familiar with the talks.
The plans to refinance its loans are helping Noble shares and bonds to recover. Its shares rose to a near 3-month high of 47.5 Singapore cents on Tuesday, from a low of 26.6 cents in mid January. The price of its notes due 2018 rose to 60.3 cents on Tuesday, up from a low of 41 cents in January, in part helped by the refinance plans but also by a recovery in oil, iron ore and other commodities prices.
Noble Chief Executive Officer Yusuf Alireza needs to refinance loan facilities before they expire between mid-April and the end of this year. Discussions with banks are “well advanced,” he said on Feb. 25, as the company posted its first annual loss since 1998.
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The company’s shares were hammered in 2015 after its accounting practices, including how it values long-term contracts, were criticized by the anonymous group Iceberg Research.
Ray Choy, regional head of fixed income and currency research in Kuala Lumpur at RHB Research Institute, said that the recovery in commodity prices was the main factor behind the rally in Noble’s bonds.
“While refinancing could occur due to good access to capital markets, the credit fundamentals of Noble still warrant some caution,” he said.
Noble Group is among the few commodity traders — including larger competitors Glencore Plc and Vitol Group BV — that still finances itself via unsecured loans, without pledging collateral, instead relying on its creditworthiness. Other trading houses, including Trafigura Group Pte, raise credit by pledging collateral such as copper and oil stocks.
The company has been under pressure from banks to shift its financing to secured financing, particularly after Standard & Poor’s and Moody’s Investors Service cut the company’s debt rating in December. For the lenders, a move to secured finance also has some advantages. Under the Basel III rules put in place after the 2008 financial crisis, banks have to set aside far more capital for unsecured finance than for secured loans.
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