Hong Kong-based Noble Group, Asia’s largest diversified commodities trading company, successfully launched a US$500 million bond issue in May attracting a massive demand of about US$4 billion.
The five-year Reg S/144A deal, which was priced at par, offered a yield of 8.5% or at the tight end of the guidance of between 8.5% and 8.75%. This is equivalent to a spread of 527.9bp over US treasuries.
Bankers familiar with the transaction regard the offering as the reopening of the Asian high yield bond market, while rival bankers dismiss such description. The crux of the matter is the company’s diverse ratings from the credit rating agencies.
Standard & Poor’s assigns Noble a BB+ rating, or the top rung of sub-investment grade, while Moody’s and Fitch Ratings assign Ba1 and BBB-, the bottom rung of investment grade, respectively.
“The deal did not have a covenant package, so it is not deemed to be a true high yield corporate deal,” a banker who was not involved in the transaction says. Citi and JPMorgan acted as the joint bookrunner for the offering.
“The fact that this issuer is in the sector that is performing well is a key reason why the deal was successful,” a banker says. “If you bring a right name into the market at a fair price, the deal can get done. Noble was willing to work with the accounts and listen to investors. They did the sensible thing in terms of pricing.”
The banker says Noble could have tried and pushed the pricing tighter, but decided against it in the wake of a weakening market around the time of pricing. “The company felt that the right thing to do was to price the deal at the tight end of the guidance,” he adds. “It decided not to revise the price range and this could have potentially left a bad taste to the transaction.”
The bonds traded up as high as 101 at the break of the syndicate and tightened later to 100.375. “Had the company not stuck to the original guidance, this deal could have been yet another underperforming transaction,” the banker points out.
The banker away from the deal describes it as a good trade. “It is a good deal to get done. Noble is a much-liked name in Asia,” he adds.
US investors drove the deal with a take-up of 46%, which is in line with Noble’s decision to tap the 144A market. Another 34% of the paper was distributed in Asia and the remaining 20% in Europe. Asset managers accounted for the bulk of the bonds with 70%, while insurance companies and pension funds bought 17%, banks 11% and retail 2%.
In assigning a BBB- rating to the deal, Fitch notes that Noble’s rating is constrained by its business model, which requires significant and increasing working capital, supported by debt to finance it. It says the company’s working capital includes not only inventory but also prepayments to suppliers and cash balances with future brokers for margin purposes. “The company has consistently been generating negative operating cash flow, owing to the rapid growth of its business volumes and commodity price increases, which add to the need for working capital,” Fitch explains.
On the other hand, despite a rise in financial leverage in fiscal year 2007, Noble’s liquidity is enhanced by its readily marketable inventory, which Fitch describes as very liquid and short-term in nature and substantially hedged against price risks.
Noble’s success was in stark contrast to the fate suffered by PT Truba Alam Manunggal Engineering of Indonesia, which was forced to cancel its high yield offering due to lacklustre demand. The company launched a guidance in early May for a US$100 million to US$150 million issue at a very high yield of 17% to 18%, but failed to persuade investors to join in the transaction. “It is a tough name to bring to the market because it has a checkered history,” one banker points out. “It indicates that investors are very selective at this point in time and that pricing cannot solve everything.” – CS
