Monthly Archives: May 2017

Banks Chasing the”tails” in Hong Kong -The Noble Group (來寶集團)

Noble Group (來寶集團) has no or few audited flow supporting their 48B$ sales of commodities.

According to the industry, their turnover, by any account, would appear as vastly overstated.

At an average of 10 days shipment and with cost of the goods sold of $48.58B FY16, the average inventory in transit recorded by Noble would have to be at least $1.256B. The the audited number was only $2.6M FY16.

FY2016 The average transit time of Noble was now 0,019 days, either implying that Noble has used scuds to ship the company  or that the corporation had a COGS inflated by 10 to 15 times in 2016.

Noble Group inventory in-transit

Noble Group Ltd. Financial Statements 31 December 2016

As of May 2017 the company had YTD losses (330) Millions in operating cash-flows but self-assessed itself with a net equity of $3.849B while of this net equity is tied to the fair value gains of its derivative and long-term commodity contracts.

Iceberg Research, the research firm has challenged Noble Group (來寶集團) over mark-to-market accounting of these contracts.

Bankers know that the last 24 months have been punctuated by a series of catastrophes, credit downgrades and bizarre resignations at Noble.

CEO ex-GS Alireza, Mr. Elman and Noble Group’s chief financial officer Robert van der Zalmin particular which has stepped down from his position after taking a leave of absence for “health reasons”.

Traders (smart money) have also left at the right time. (Fabrizio,Steve Bader, Paolo B, Ted, Doug M..)

As of Q1-2017, Noble Group (來寶集團) had $3,4B of marked-to-market fair-value gains on derivatives and commodity contracts.

What does the $3.4B MtM figure represents ?-this MtM is not contracts that can be liquidated to cash.

noble group enron

Mark-to-market (M-t-M)

To mark-to-market is to calculate the value of a financial instrument (or portfolio of such instruments) at current market rates or prices of the underlying.

http://www.risk.net/definition/mark-market

Example for illustrative purpose:

On 1 Jan 2017: Noble buys 2,000,000 MT for June 2019 delivery at $59/mt. It turns immediatly in the derivatives market and sells the equivalent of 2,000,000 MT of paper contracts. This is the Coal API2 Argus futures contracts.

This is the Coal API2 Argus Futures Contracts.

COAL API2.png

Timeline

1 Jan 2017: Noble has a +MtM of 0 (Contract price is $59 and the Argus Futures is at $59)

1 Feb 2017: The Argus Coal API2 futures is at $64,25. The +MtM on the coal contract is +$10,5M

20 March 2017: The Argus API2 Futures dropped to $59,25/MT The +MtM on the coal contract is +$500K

1 May 2017: The Argus API2 settled at 62,55 and the +MtM on the coal contract is now +$7,1M

Noble Group MtM on Coal contract:

mtm coal noble group.png

The 2,000,000 MT of Coal produces a MtM gains between $500K and $11.5 millions.

seanergy-maritime-capesize

Capezize Ship

In order to produce $3.4B of MtM gains one would have to buy not 2,000,000 MT of coal , as in this example, but nearly 958 million metric tons – the equivalent of 6937 Capezize cargoes Richards Bay-Qingdao, China or 5 voyages per week for the next 13 years… plus an equivalent position in the derivatives.

This represents a considerable tonnage even for the largest firms of the industry (Cargill, Rio Tinto, BHP, Vale, Anglo American) put all together.

According to BP statistical review of word energy 2016, the world coal production was 786.1 million tonnes (2015)…

An inevitable conclusion is that Noble uses a mountain of derivatives to maintain its MtM coal pile or … something else

Back-of-the-envelope calculations suggest that the $3.4B MtM mark used by Noble Group(來寶集團)  translates to coal hedges at 479 USD/MT– The Argus APi2 CIF Rotterdam futures in the $60s/mt.

So…. Accounting fraud …. ?

Won’t  be the first time…

 

These days Noble is looking to refinance a $3.849B net equity. which has more the financial substance of a “Fair-value to-arrive equity” (sic)

This happens at a moment when Noble has just screwed up both its recent fixed income investors and shareholders.

The thing that frightens banks the most is not having a good risk management process in place because it opens the possibility of financial losses and frauds. A trader with no risk management is like playing roulette; double or quits.

Fraud is the worst nightmare for any bank specialized in commodity lending, but some will always chasing the“tails” in Hong Kong no matter what.

the Noble Files 高贵组文件 研究

Noble’s only escape is to borrow more debt to cover its debt service and booked net equity.

Like Wilmar, Noble had not 2 but 3 years to renovate itself and they failed.

  • Noble Group (來寶集團)  has generated negative cash-flows from the operations to the tune of
    -$1600M in 2014
    -$600M in 2015
    -$900M in 2016,
    -330M for Q-1 2017
    Noble has no intrinsic value by DCF. The book is not performing.

The market is not over-reacting.

The question is now rather about how Noble can still suggest that they are a $3.9B equity company (” their fair-to-arrive net equity”). 

Simply because Noble knows it cannot devalue its substantial booked value.

  • Q1 Noble Group Limited.png
  •  Bye Elman, the chairman and co-founder has officially resigned.

Noble has screwed up itself, its fixed income investors and its shareholders.

  • Only two months ago investors were lured by a 8.75% coupon  750 million unsecured bond. The maneuver was purposely to win time and bridge financials until Noble could conclude a potential deal with an acquirer (Sinopec).
  • No immediate performance catalysts suggest that this transaction is even remotely possible.

Noble nobbled.png

  • This unsecured bond issued at a 8.75% is now trading at 50. We no longer talk of yield to maturity but recovery rates.
  • This bond has to be refinanced next April.
  • By what ?
  • You need to factor if Noble can issue another 750M bond this time at 18-20% coupon and assume that the same investors bited by the snake will want to lose 100 to 50.
  • Equity investors who also subscribed to the 500M share rights issue at 0.20/share are now at 0.05.
  • Can some undisclosed aspects of Noble performance could have made the company less attractive to these investors ?


-The trader has lost $5.5M of Operating cash-flows at the end of each business day Monday-Fri during Q1.

How a serious bank will support the financing on no acceptable performance ?

Noble Group (來寶集團) is now two things; coal and oil liquids.

Credit lines have been granted on the performance of the oil liquids, the so-called “ebit indestructibility” of the Noble oil liquids segment but for Q1-17 the operating income from Supply Chains of $27M doesn’t even cover the interest rate load on this segment.

As alluded earlier, Noble Group is again in the sights of the credit agencies.

S&P questions the financial guearing of Noble. 

Noble’s only escape is to use a 2nd credit card to cover its $220M annualized interest bills and refinance its “fair-to-arrive” net equity. 

We are heading towards a restructuring event.