OREANDA-NEWS. Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Hong Kong-based commodities trader Noble Group Limited (Noble) to 'BB+' from 'BBB-'. The Outlook is Stable. Fitch has also downgraded the senior unsecured ratings to 'BB+' from 'BBB-', and removed the ratings from Rating Watch Negative.

The downgrade reflects Fitch's expectation that Noble's debt structure is shifting towards shorter term financing to complement its asset-light business model that focuses on working-capital management, and to reduce overall finance costs. This will result in a weakening debt maturity profile, which Fitch deems no longer to be consistent with an investment-grade rating.

The Stable Outlook reflects Noble's continuous improvements in its balance sheet and its commitment to maintaining sufficient liquidity to cover its working-capital needs.

KEY RATING DRIVERS
Focus on Short-Term Debt: Fitch expects Noble to use more short-term debt to complement its asset-light strategy and to reduce overall financing costs - resulting in a weakening debt maturity profile. This is reflected in its recent refinancing of USD1bn of unsecured committed bank facilities which contains only a one-year tranche compared with multiple-year tranches in previous years.

Limited Use of Secured Debt: Noble's secured debt as a percentage of total debt has always remained very low, at less than 10% (less than 8% 1Q16). We understand that the company intends to utilise more borrowing base facilities for its working-capital financing, in particular for the issuances of letters of credit (LCs), rather than for secured debt drawdowns. However, a significant increase in secured debt could reduce the company's unencumbered assets relative to its unsecured debt.

Balance-Sheet Improvements: Noble's ratio of working capital/total debt (including 50% of perpetual capital securities as debt) improved to 1.12x in 1Q16 from 0.96x at end-2015, consistent with our previous expectations. This ratio may improve further as Noble is planning an additional USD1bn of liquidity inflow from sales of non-core assets and equity raising. Higher-rated peers like Archer Daniels Midland Company (A/Stable) and Bunge Limited (BBB/Stable) had working capital/total debt ratios of 1.34x and 1.10x, respectively, at 1Q16.

Sufficient Liquidity: Noble's current liquidity stands at USD1.86bn (comprising of USD862m of unrestricted cash and equivalents and USD1bn of undrawn committed facilities), down from USD2.16bn at year-end 2015. This is equivalent to 1.25x inventory, which we believe is sufficient to cover requirements arising from reasonable commodity price increments.

However, we do expect this ratio to decrease in the short-term after repayment of its debt totalling approximately USD1.6bn in May. This temporary reduction in liquidity headroom is partially relieved by a potential drawdown from its newly signed USD2bn borrowing base facilities, and will increase post-realisation of planned equity placement and non-core asset sales.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Sales volume to remain similar to that of 2015
- Capex and business acquisitions of USD100m-150m a year

RATING SENSITIVITIES
Positive: Developments that may, individually or collectively, lead to positive rating action include:
- The company reverting to more longer-term and competitively priced funding on a sustained basis.

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Working capital/total debt sustained below 1.0x
- Liquidity position (as defined by unrestricted cash and cash equivalent plus undrawn committed facility) to total inventory sustained below 1.0x (1.25x at 1Q16)
- Sustained negative cash flow from operations (CFO was negative in 2014 and 2010)
- Weakened business strength, as evident from reduced funding capacity to support working-capital expansion over the cycle or sustained decline in tonnage volume that is more severe than industry performance, and evidence of weakening of risk management process
- Sustained weakening of quarterly EBITDA / working capital below 3%
- Senior unsecured ratings might be notched down if there is insufficient coverage of unsecured debt by unencumbered assets.