Noble Group last night raised S$634.6 million ($500 million) from a top-up placement that was upsized following good demand. The deal, which was only the third equity transaction of size to price in Asia since the beginning of February, came just three days after Noble posted stronger-than-expected full-year results and may well be the start of a new wave of follow-ons as companies emerge from their earnings-related blackout periods.
True, the secondary markets are volatile at the moment and there are concerns about a further escalation of the violence in Libya and its effect on oil prices, but in a way, that could act as an incentive for issuers to come to market now – in case the market environment gets worse later. Indeed, the busy start to the year in the dollar bond market is partly driven by a desire to get fundraising done before interest rates start to rise.
According to sources, Noble will use the proceeds for general corporate purposes, although the understanding is that this primarily refers to capital expenditure, including further investments and acquisitions. In December, the Singapore-listed supply chain manager and commodities trader agreed to buy two sugar mills in Brazil for $950 million (the transaction is set to close this year) and, in a conference call following Monday’s earnings release, the management indicated that it is working on a number of investments.
At the end of 2010, the company had cash on hand of about $1.6 billion, but by adding further to that it is giving itself added flexibility in how it funds future acquisitions without running the risk of a potential ratings downgrade. The latter is of particular importance to Noble as it achieved an investment-grade credit rating from both Moody’s and Standard & Poor’s as recently as 2009 and wouldn’t want to slip back into high-yield territory, which is looming just one notch below.
“Noble achieved record volume, revenue, and profit in 2010, reflecting robust market conditions, added capacity, and contributions from new acquisitions,” said Elizabeth Allen, a senior credit officer at Moody’s, in a comment on the earnings. “However, such business growth resulted in higher working capital funding needs and thus in increased leverage.”
Allen added that any material acquisitions, including the two Brazilian sugar mills for which Noble is conducting due diligence, could strain its balance sheet.
Noble’s credit ratios for fiscal year 2010 were in line with Moody’s expectations, but were weak for its Baa3 ratings, the ratings agency said. Still, it maintained a stable outlook on the company, which it said reflects its understanding that “Noble is committed to an investment-grade profile and hence expects management to take appropriate actions in 2011 to improve its credit ratios”.
Noble initially offered 248.8 million shares at a price between S$2.07 and S$2.12, which translated into a discount of 2.75% to 5.05% versus yesterday’s closing price of S$2.18. It also flagged that the deal might be upsized and after three-and-a-half hours of bookbuilding the demand was strong enough to do so.
According to a source, the final deal size was increased by about 23% to 306.5 million shares, or 5.1% of the company, allowing Noble to raise $500 million. In return, the company, guided by joint bookrunners Goldman Sachs and HSBC, chose to fix the price at the bottom end of the range for the maximum 5.05% discount.
It is unclear whether Noble could have priced it any higher, if it wanted to, as there was some price sensitivity at the low end. That isn’t too surprising since the share price gained 6.8% on Tuesday following the earnings, and even though it stayed flat on Wednesday and slipped 0.5% yesterday, the placement price was still above Monday’s close of S$2.05.
The share price is currently off 6.8% from the 52-week high of S$2.34 in early January, but is still well above the 2010 low of S$1.56 that it reached in August.
The timing of the sale was perfect in the sense that the strong 2010 earnings – net profit increased 11% to $606 million and gross profit from the agriculture segment was up 121% -- have attracted a lot of attention to the stock and resulted in a number of earnings upgrades from analysts following the company. Analysts also remain overwhelmingly positive on Noble with 20 out of 21 recommending a buy on the stock.
Indeed, quite a few existing shareholders bought into the placement and the final order book included a lot of chunky long-only orders, which left the deal “comfortably oversubscribed” and made the bookrunners confident about increasing the size. The offer was open to onshore US investors and the demand from the three major regions was roughly equal, with only a slight bias in favour of Asia and Europe. About 90 investors participated in the transaction.
The deal was facilitated by chairman Richard Elman, who provided the shares that were sold through the placement. He will now buy the same number of new shares at the same price from the company to ensure all the money ends up with Noble. Prior to the placement he held about 23.5% of the company, although that will drop slightly due to dilution.
Noble’s portfolio includes agricultural, metals, minerals and energy products, as well as fuel terminals and storage facilities, ships for transport, ports and other infrastructure. It operates in 38 countries and serves more than 4,000 customers.
