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The end of Noble Group?

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Embattled Noble Group firmly had investors on tenterhooks as media reports emerged of DBS bank cutting lending facility and the resignation of co-CEO. The double blows sent share price plunging to $0.198, below the $0.20 critical support level. Considering the fact that there was a 10 into 1 share consolidation done in May 2017, the adjusted share price is actually $0.0198.

Investors who had subscribed to the rights issue in last year would have lost their pants if they had held on to the shares until today.

A week before, the SGX-listed company reported a stunning USD1.17 billion losses for the third quarter. Losses for the nine months ending 30 September 2017 amounted to a scary USD3 billion. Prior to this, investors were already preempted about the gigantic loss on 23 October 2017. Nonetheless, the latest setback sent the shares into a tailspin. Is it really the end of Noble Group?

Noble Group

The frightening aspect of the latest results was the staggering amount of cash that Noble Group had been burning and the amount of outstanding debts looming. The net cash outflow from operating activities amounted to USD478 million. Net debt amounted to USD3.7 billion as of 30 September 2017. With cash and cash equivalents of only USD339 million, the commodity trader may face liquidity issue in the coming months.

The figures are worrisome and raised fresh questions among investors on whether Noble Group can survive this sink-or-swim battle which had already lasted for two years. Previously, I have expressed confidence that it would pull through this crisis but my optimism was based on the premise that its survival strategies would work. Perhaps my optimism had been premature as it seemed that the management had not figured out a viable solution after a protracted saga. With DBS pulling the plug, the prospect is really grim for Noble Group.

Asset sales

Indeed, the struggle of Noble Group is puzzling given that the once-mighty commodity trading giant had implemented various desperate measures to address the plunge in commodity price and short-selling attacks arising from accounting malpractice accusations. For the past two years, major assets that were sold included Noble Agri (USD750 million), Noble Americas Energy (USD1.05 billion) and Watt Power (USD23.5 million). In spite of these significant asset sales, it seemed that the fund raised was still not sufficient to plug the gaping hole in its finances and further asset monetization may be needed.

Make no mistake, the distressed company we are talking about is Noble Group, once ranked among the top commodity trading companies in the world. In fact, Noble was still included among the elite STI benchmark until it was dropped by Singapore Exchange in early 2016. In the good old days, the company was valued at USD10 billion. With the string of asset sales, the value has plummeted to below USD400 million and shrank the once-sprawling billion dollars commodity company considerably.

Under the strategic review announced in July 2016, the debt repayment framework consisted of cash flow from coal, LNG and freighter businesses; monetization of Global Oil Liquids and North American Gas & Power businesses and proposed Asset Disposal programme.

Noble Americas Gas & Power Corp has been sold to Mercuria Energy. The sale had generated much controversies because of the less than anticipated proceeds received from the buyer. This prompted SGX to query Noble Group, which revealed that the low sale figure was due to decrease in working capital of the gas and power unit. Also, the considerations had not included in the escrow fund of USD83 million. This explained why Noble Group received only USD102 million (excluding the escrow funds).

Separately, Noble has entered into an agreement with Vitol US Holding for the sale of Noble Americas Corp. The transaction is expected to be completed by end of 2017. After deducting debts, the cash proceeds would have been estimated to be USD582 million.

The move to offload core assets is probably because the underlying activities had been creating negative cash outflow for Noble Group. Data revealed that net debt increased by USD833 million from USD2.87 billion as at 31 December 2016 to USD3.7 billion as at 30 September 2017. Within the span of just nine months, Noble incurred substantial amount of debts from its operations. Therefore, selling these core assets is not an option. Its remaining Energy Segment, comprising mainly of coal business, had also not performed to expectation. Income for the nine months amounted to a loss of USD96 million, compared to a gain of USD280 million in previous year.

Bank loans and bonds

At the moment, Noble Group is fighting fire on two fronts – managing bank facility and ballooning debts. As commodity trader, access to bank facility is critical for trading but the crisis of confidence has destroyed the credit rating. This has resulted in fear among lenders on the potential loan defaults.

On the other hand, the situation is made worse with the various bonds due to mature in coming months. The first is the USD379 million medium term note due on 20 March 2018, then there is the USD1.18 billion Senior Notes due on 29 January 2020 and the USD750 million Senior Notes due on 9 March 2022. Noble Group also got USD400 million Perpetual Capital Securities.

White knight

Long-term investors of Noble Group could be forgiven for feeling angry and frustrated by the slew of negative publicity. On the surface, all these troubles seemed to be insurmountable. But actually, with the emergence of a powerful white knight, all the issues could be resolved magically. A few years ago, Singapore’s Temasek Holdings single-handedly rescued Olam from similar situation. Thus, I don’t see why Noble could not achieve a similar turnaround with a white knight.

However, let’s not forget that China’s sovereign wealth fund, CIC, remains a loyal major shareholder with 9.61% stake in the company. Middle East’s Abu Dhabi’s Goldilocks Investment Company is another surprise recent major shareholder with 8.19% stake. With such strong support from the big boys, it is hard to imagine Noble Group sinking into abyss. It is even more outrageous to suggest that another white knight is needed to rescue the ailing commodity trader out of this mud.

But the situation is critical right now. In my opinion, I do not like the approach of selling core assets because the business model of Noble Group was the main appeal that attract investors in the first place. Asia-Pacific is a growing region with demand for commodity anticipated to be growing for the next few decades. Being located in Singapore, Noble is at a strategic location. Nevertheless, in view of the negative cash outflow, the group has no choice but to continue selling assets.

Previously, I have suggested that perhaps Noble Group should go for another round of rights issue. I know investors would be angry with this idea because in 2016, USD500 million of rights had been issued at steep discount of $0.11 per share.

But then, investors should stay rational and think about it. The reason for a company to seek listing in the bourse is to raise cash, through rights, shares placement, bonds, etc. If Noble Group cannot get access to bank facility, and with dwindling cash, it would soon enter into default with the looming debts. Thus, rights issue could offer the best chance of survival. It is now or never.

In conclusion

Investing in Noble Group has been a treacherous journey. In view of the chaotic situation, it is best to let the dust settle before entering this counter. Although I am not vested, I know there are many people who had poured their savings into this counter.

Thus, I do not wish to see Noble Group goes down in flames. There are solutions and there have been cases of similar turnarounds – Olam and Osim. But time is running out for the founder, Richard Elman. Till then, enjoy the ride.

Read my articles on Noble Group:

  1. Nightmare of Noble Group continues
  2. Noble Group’s horror show
  3. Noble Group new white knight?
  4. Will Noble Group shares see daylight again?
  5. Collapse of Noble Group share price
  6. Meltdown of Noble Group shares
  7. Noble Group will sink or swim?
  8. Is Noble Group doomed?
  9. Will Noble Group do an Osim or Swiber?
  10. White Knight for Noble Group
  11. Mayday for Noble Group!

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