“The Big N”

On May 17, Fitch has joined Moody’s and Standard & Poor’s in cutting the Hong-Kong trader to junk, citing a shift toward a short-term financing would weaken their debt profile to a point they could no-longer be investment grade”.

“Noble has lost US$1.5 billion in bank lines. Trade and other payable has decreased by US$1.271 billion with approximately 50% due to the tightening of the Group’s uncommitted unsecured bank lines which resulted in a reduction in the availability of term letters of credit”.

Noble Group MD&A Q1-2016  p.18

“The decrease in trade and other payables was due to: “in the money” Oil Liquids futures contracts rolling off with corresponding decrease in cash margin liabilities to brokers which are included in trade and other payables; and the tightening of the Group’s uncommitted unsecured credit lines.”

Noble Group Q1-2016 Presentation p.10

A) When creditors withdraw credit or change the terms on which it is granted, the trade book has to be unwound and/or positions are no longer profitable and the trader realize mark-to-market.

B) Because of losses, trade counterparty increase collateral requirements, raising the cost of financing of holding a long position on a commodity or hedging in the OTC market.

 

C) A risk reluctance is first reflected in the higher credit spreads.

Banks become more reluctant to lend.

Brokering counterparties in derivatives ask collateral to take the other side of the trader. 

Counterparties in billateral commodity contracts also ask collateral or refuse to open Letter of Credit instruments (L/Cs).

Working capital is in jeopardy and negative operating cash flows result.

 

D) In a liquid market, the trader make offer to the trade, offering creditors 70 cent on the dollar with a debt-equity swap.

E) However in an illiquid asset market, the banks force the trader to raise cash by liquidating illiquid assets at distressed to meet an immediate demand for cash- it’s the trader who is taking the losses, working for the banks.

December 2015: In a fire-sale, Noble Group has sold its 49% stake in its agribusiness segment to Chinese state-owned enterprise COFCO for US$750m.

The stated book value of Noble Agri’s was US$1.34 billion and after having announced the deal, Noble disclosed that it will book a non-cash loss of around US$546m due to the difference between the carrying value of Noble Agri and realized sale.

 

F) Realized Losses on the Trade, on the Assets and negative cash outflows put further the commodity trader in the red.

 

noble group q12016 cash-flows.png

 Noble Group Q1-2016, SGX release P.8 Statement of Cash flows

 

G) The report of losses raises more awareness about their Solvency (having a positive amount of equity (Asset greater than Liabilities).

 

[A) B) C) E) F) G) are all ticked with Noble Group Ltd].

 

Liquidity and Solvency are linked by asset value and the gain and losses of the trading position on commodity contracts.

The idiosyncratic point about noble group is about whether Noble is overvaluing assets and booking large profits on long-term supply deals before it received any cash from the transactions.

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The consolidated balance sheet of Noble Group Ltd for Q4-2015, shows that a drop of less than 19% in the assets value would render this commodity house insolvent.

[As of Q1-2016,using Noble’s risible net assets of $3,4B (booked equity) it was -23% and using the market equity value it was only  -10%].

 
 
 
“Since March 21, the big N is no longer one of the 30 constituent of the main equity benchmark in Singapore.
 
After consultations with the market participants in the city-state, FTSE Russell has  removed Noble Group Ltd. from the Straits Times Index (STI)”. 
 
 
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