Non-cash impairment in Q4

　　Noble announced a non-cash impairment of USD1.2bn in Q4 ahead of itsearnings on Thursday. This is in addition to the USD546m of non-cashimpairment associated to the 49% sale of Agri. About half of thoseimpairments came from its level 3 net fair value portfolio (rest came from a mixlevel 2 net fair values, associates/other equity investments). We believe this isa better outcome relative to the market-implied recovery value on its seniorunsecured curve. The net fair value portfolio stood at USD3.4bn at end ofDecember of which c.USD2.8bn is in level 1 and 2 assets and c.USD600m inlevel 3. More details to come on Thursday. The impairment was triggered bylower commodity (mainly coal) price assumptions. Specifically Noble reducedits thermal coal anchor price to USD55/t, which is conservatively 20% loweragainst current market consensus. The effective discount rate of its entireportfolio of net fair value gains is 20%.

　　Positive cash flows

　　Noble realized c.USD650mm in operating cash flows in the 2H15. Pleasinglythis implies two consecutive quarters of positive operating cash flows (Q3:USD318m, Q4:USD332m). Despite doubts around the MTM of its net fairvalues, the portfolio continues to perform in line with expectations with cashrealizations of c.USD360m in FY15. We think this provides some comfortaround Noble’s revaluation techniques/assumptions. Cash flow realizations areback tested on a monthly basis. We like the new disclosures around cashrealizations on its net fair values. Noble expects cash realization of aroundUSD300-350m in FY16.

　　Debt reduction in Q4

　　Net debt stood at c.USD4bn at end of Dec 2015 (c.USD3.2bn on a pro-formabasis if Agri sales proceeds were applied). This compares with a net debt ofUSD4.2bn at end of Sept 15, implying debt repayment of around USD200mduring Q4. We think realizing positive operating cash flows and debt reductionin a challenging quarter was a positive outcome for creditors. Cash balancestood at USD1.95bn at end of Dec, up sharply from c.USD1bn in Sept – bulk ofwhich we suspect came from drawing down of its committed undrawnfacilities. More details to come on Thursday. Management also noted thatNorth American Energy Solutions (NAES) is marked at historical cost, which issubstantially lower than market value. No further updates on how Noble willmonetize the asset but we think this could provide additional liquidity/NAVbuffer for bondholders.

　　Maintain CreditBuy on NOBLSP’18

　　Our view was largely underpinned by the improved liquidity buffer post theannounced Agri sale back in December last year. The bonds haveunderperformed in very thin markets along with the global sell-off incommodity credits but we believe the idiosyncratic story is gradually improving(positive cash flows, debt reduction,. conservative/timely mark-to-market,focus on liquidity and balance sheet). We expect the April/May loanrefinancing to go through albeit perhaps at a smaller size but would pay closeattention to the key terms (secured v unsecured). We have prefer NOBLSP’18($50, 40% YTM) 2018s over the 2020s ($47, 30% YTM, CreditHold) given theinverted curve. Downside risk: a further leg down in commodity markets,material structural subordination. Upside risk: Further asset sales/strategicinvestor, a successful bank refinancing in April/May.