Noble Group’s Battle For Survival
Launched by Richard Elman in 1986, Noble Group, a Hong Kong-based commodity trading firm, enjoyed a remarkable degree of success as it quickly expanded operations. In a little over two decades, the company established offices in 40 countries as it built its business of trading in metals, coal, gas, oil, grains, and coffee.
In 1997, the company was listed on the Singapore Exchange (SGX). It expanded rapidly as it became an important supplier to firms on the Chinese mainland. Noble Group’s shareholders made large gains as the company’s market capitalisation reached a level of US$10 billion.
But today the firm is a shadow of its former self. Its shares trade at a paltry S$0.235 giving it a market cap of less than S$300 million. What happened to Noble Group? Did the management misjudge the market and make the wrong business decisions? Or, is its downfall due to other reasons.
A little-known research firm, Iceberg Research, says that Noble Group has used dubious accounting methods to boost its profits. In an open letter to Noble Group’s creditors, Iceberg has made various allegations. It says that the commodity trader has overstated its assets and profits and that its auditor has failed to point this out.
Founder Richard Elman, a British businessman, started out as a 15-year-old labourer in a scrap metal yard. Sixty years later, at the age of 75, he had a personal net worth of US$1.5 billion.
However, the company that he has built is now struggling to survive. In an attempt to restructure the bloated balance sheet, Noble Group’s management has proposed to cut down its debt from US$3.4 billion to US$1.7 billion.
A raw deal for investors
The proposed restructuring of Noble Group will result in converting US$1.7 billion of debt into new equity. The company’s creditors, which include hedge funds Varde Partners, Och-Ziff Capital Management LLC, Davidson Kempner Capital Management LLC, and Taconic Capital Advisors will own about 70% of the new company.
The management will get 20% of the shares of the restructured company and the remaining 10% will go to the current shareholders.
Over the last two years, the Noble share price has already seen a steep fall:
Noble Group Share Price
The holders of Noble’s perpetual bonds will also have to bear a large loss. US$400 million of perpetual bonds will be converted into US$15 million of new securities.
Referring to the restructuring proposal that Noble Group has made, Justin Tang, head of Asian research for United First Partners, an investment advisory firm, says, “The announcement is the confirmation that shareholders and perpetual shareholders have been dreading.”
Goldilocks questions the restructuring
A major shareholder, Abu Dhabi’s Goldilocks Investment Company, has said that the restructuring deal is unfair. In mid-2017, Goldilocks held a 5.03% stake in Noble. In July of that year, the investment firm purchased an additional 41.6 million shares through a market transaction valued at S$23.2 million. It now owns 8.19% of Noble.
Recently, Goldilocks wrote a 17-page letter to the SGX asking for an investigation into Noble’s sale of some of its businesses. It alleged that the commodity trading firm had disposed of some of its assets at values that were lower than the market price.
The deals that have been questioned are the sale of Noble America Corp and Noble Americas Gas and Power Corp. What is Noble Group’s response? The company says that the process was completed at a time when Noble was in “distressed circumstances.” Additionally, the transactions were monitored by the company’s creditors.
But that explanation has not cut any ice with Goldilocks. The investment firm says that the management of Noble is “enriching” itself by acquiring 20% of the company while the shareholders are being given only 10%.
Goldilocks has also questioned the movement of the company’s share price in recent months. It has asked for an investigation into price variations at the time of announcements by Noble about fresh infusions of capital into the company.
On its part, Noble’s management says that every time it made an announcement, it did so on the basis of developments that led them to believe that a deal would soon be finalised. But why didn’t they release information about the names of the potential investors? Noble says that it didn’t want to unnecessarily raise “public interest.”
Will the restructuring succeed?
Noble Group’s revenues are shrinking and the company is bleeding cash. In the 12 months to December 2014, it had revenues of US$86 billion. A year later, this figure fell to US$67 billion. In 2016, revenues were even lower at US$46 billion.
The financial results for 2017 are even worse. In the June quarter, Noble made a loss of US$1.9 billion. Subsequently, in the September quarter, the loss stood at US$1.2 billion.
The only way that the company can hope to survive is by persuading its shareholders to agree to the restructuring that it has proposed. But the proposal also requires the approval of the perpetual bondholders who will see their US$400 investment reduced to US$15 million.
The new Noble will be called Topco. A key feature of the restructuring plan is that the new entity will get access to a US$700 million trade finance facility that will be backed by some of the company’s creditors.
This line of credit will play a crucial role in Noble Group’s revival. However, in a recent announcement, the company’s management said that it was yet to finalise the terms of the new loan.
Noble Group’s management will have to persuade 51% of its shareholders and 75% of its creditors to agree to the terms of the restructuring package.
The company’s chairman, Paul Brough, is the liquidator of eight Lehman Brothers entities in Hong Kong. His expertise will be useful in Noble’s revival.
Brough says, “I have consistently stated my objective of avoiding any form of insolvency proceeding.” But that may be a difficult task in view of the fact that some of the stakeholders seem to be vehemently opposed to the restructuring plan in its current form.