The Net Equity (Assets-Liabilities) is used by lenders to fund a trader.
Noble Group has not built net equity, losing more than $3B in Free-cash-flows over the last 29 months.
This is the loophole:
The backbone of Noble Group’s net equity represents future gains on commodity contracts that are re-evaluated/impaired only once a year under IFRS 13-Fair Value Measurement. Net Fair Value G/L on commodity contracts accounts for more than 102% of Noble Group’s equity.
Not only this FV on G/L can be improperly valued.
Noble has also to fund this “Fair-value to-arrive equity”.
Noble is not worth its book value, or even 62% of its book value. It is worth much less than that, if there is any residual value left. Discussions are only at early stage and due diligence typically takes six months to a year. Any potential investor needs to value the commodity contracts, which are the heart of Noble’s financial manipulations. This includes the fair value gains ($4b, nothing less than 102% of equity) but also importantly the future liabilities ($1.7b). The investor has to make sure that no off-balance commitment is hidden, etc. This is a very lengthy process. After we published our reports, Noble kept repeating that these contracts were correctly valued. Then 48 hours before their 2015 annual results, Noble and its auditor, EY, suddenly realized that these contracts had to be impaired by $1.1b. Oops!…
So are commodities contracts (assets and liabilities) correctly valued now? Of course, they are not. Noble has been battling liquidity issues for months and any trader would have sold these contracts a long time ago if they were valued correctly.