Category Archives: Credit

Noble’s “Reverse Working-Capital”…

All traders share an aspiration to borrow OPM and most of them, one day, will trade with money they aren’t eligible. Noble fell very young in the powder pot.

At one point in the time, Noble Group certainly received liquidity that they didn’t qualify for–Now the same banks are scrambling to unwind Noble’s balance sheet.

From FT

“Noble said the lower than expected sale price for its gas and power assets reflected the conversion of working capital into cash and a revaluation of trading positions due to “market volatility”.

“Mercuria had paid $102m for the business and deposited a further $83m in an escrow account”. 

“That figure is much less than the $261m Noble estimated it would be paid for the business last month when it asked shareholders to approve the sale”.

  • The conversion of working capital to cash assets is the portion attributed to the Gas/power unit on Noble Group Q3’s consolidated Balance sheet, Statements of Cash-Flows and Income statement.

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  •  $76,000,000 of Noble Gas & Power valuation was the working capital attributed to third parties or Banks (payables finance, inventory finance, receivables finance).

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  • Mercuria has paid the agreed price on the BUs to the seller minus this reverse-supplied capital by third-parties e.g restating the sales and actual P&L of Noble Gas & Power.

 

Mercuria Noble Group value breakdown.png

 The unit was marked by Noble at $394M in 1H-2017.

  • The $185M paid by Mercuria for Noble Gas & Power also suggests that Noble self-estimated the BU at more than twice its net asset value.

“Under a deal agreed in the past couple of weeks, Mercuria has given Noble access to $400m of its unutilised credit lines in return for a fee and information about its trading positions in coal and iron ore, according to people with knowledge of the arrangement.”

To avoid confusion, Mercuria isn’t altruistically given access but is tentatively placing the deal externally for a 200-250bps fee, contingent to 80/20 banks money and two leveraged funds money-without any risk or fiduciary relationship to the related parties we muse.

These funds are not first-payee loss in the case of a total loss / get whacked.

(EFA and Inoks Capital) target 1000-1200bps net returns in Asia trade finance coveting borrowers who do not have a credit rating  / or that banks just don’t want as clients (the rotten fish).

Cost of capital is cheap, albeit distorted by low rates. 

Noble Group is the perfect designated candidate: has destroyed its credits and its WACC represents the best uncorrelated opportunity on a risk-adjusted basis.

(Except for two minor details).

  1. The counterparty in the transaction contemplated by the funds doesn’t trade for a profit.
  2. Doesn’t generate cash as the banks unwinding the counterparty’s balance sheet.

We think concerned investors would like to develop a discussion with their private wealth advisers.

Among other things EFA and INOKS disclose very little the break-down of their funds other than a monthly return or geographies. This is perhaps the only real “informational advantage” that the “trade finance funds” have.

The Noble Files 贵族档案

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The burden of Karma is heavy as Noble crosses the gates of death.

Noble Group has the symptoms of schizophrenia. Their delusion and demise were never “their” fault or caused by the actions of “their” traders.

Caught in-between and dancing on losses, the high rollers have painted it as because of : “liquidity constraint impacting trading and earnings generation”. For Noble Group “the problem” must be the exact solution, they have punted for working capital everywhere from the MD&A to the Press/Investor Communication and Strategic Review…

The financial statements* for the six months ending on 30 June 2017 eloquently sums up the financial substance of Noble Group:

  • Noble presents itself as a  $2B net equity company with an $1,45 MtM unaudited Gains on Derivatives company*
  • The trader has -$763 million negative OCF with a net debt increased by nearly $1B to $3.81B.

* unaudited.

The Energy Segment accounts for 90% of Noble Revenues in 1H-2017.

Noble Group Business

Noble Group Limited Revenues by Segment, 1H-2017

The Energy Segment traded at a loss of $226 million during 1H-2017 (excluding financing costs and salaries).

That’s more than -$1.25 million per business day… Monday to Friday but the business is run smoothly. Of course no.

But in the world of Noble shortlisters rush on a “bargain” 🙂

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“Sale of Global Oil Liquids Sales process commenced with shortlist of bidders–bids expected in Q3 2017”

-Strategic Review Update–26 July 2017

Noble nasty.png

 

Investor Presentation Q2-2017 P.6

Out of Control

The Non-Performance of Global Oil Liquids should not be that shocking knowing the “Book now, think later” at the company. It lacks the management to impart performance.

Noble had two or three large take-of-pay deals in the U.S but the wind has changed as it always does in the physical energy markets.

The burden of Karma is heavy as Noble crosses the gates of death:

The hostile work environment includes daily vulgar and disgusting comments from male employees about vaginas, sex, male genitalia, and verbally abusive language using the word ‘f—‘ explicitly. constant abuse.”*

During 2012-2016, at the office in Stamford, Plaintiff’s seat was next to the gasoline traders which includes video conference cameras connecting with London and Houston offices.

The commentary back and forth on the Stamford desk for everybody within earshot to hear, frequently became vulgar and disgusting. This created a hostile work environment.

*Ramos V Noble Americas Corporation.

It is the last tango act of an unprincipled trader-assaillant.

Noble did the financial engineering for years and years and then the showgame broke. The typical assumption of a 40% recovery rate may indeed be too optimistic.

PwC has signed Noble’s Financial Statements but performance has inevitably caught up the accounting gimmicks.

Noble Group 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

and -433M for Q2-2017

A Toxic Legacy

Net fair value gains now stands at $1.455 billion as of end-Jun 17. 

fairtoarrive net equity of $2B* is still rather delusional for a company not producing any plus-value -Noble is losing operating cashflows at a rate between -3.5 and -$6.5M per business day in the recent quarters.

*unaudited financial statements.

Noble’s position is irreparably compromised. 

Noble group has no intrinsic value (by Discounted Cash-Flows).

The firm offers no viable future for patient capital.

Their leverage futures-physical trading model has too much impediments to break-even.


The Noble Files 贵族档案

 

The negative significance of Noble (來寶集團) Mark-to-Markets Gains on Derivatives and Commodity Contracts

Noble Group at the dusk of an agonising death spiral.

The only reproach that one could do to Iceberg Research is that he didn’t communicate well enough his message so people understand the negative significance of this $3.4B MtM or on what Noble Group (來寶集團) underpins its financial substance: a skeleton.

What is MtM and how a $3.4B MtM would translate into coal hedges)…  

Noble group fraud mtm

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

At any given time, the 2,000,000 MT of Coal produces a MtM gains between $500K and $11.5 millions.

seanergy-maritime-capesize

Capezize Ship

When Noble announced a first-quarter loss of $130m— it blamed largely on ill-judged coal trades—and it warned that it might not return to profitability until 2019.

Can you better put in context the warning that it might not return to profitability until…

These “Hedging losses” are rather because of a mismatch between the level of profits booked on these contracts and their underlying cash-flows.

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

This represents a considerable tonnage even for the largest firms of the industry (Cargill, Rio Tinto, BHP, Vale, Anglo American)  all put together and more than 1.21 year of world coal production*

 

 

the Noble Files 高贵组文件 研究

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

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 in particular who 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.

Noble Group 4th position on the top 10 commodity borrowers

Congratulations to Noble Group who now makes the top 4th position on the top 10 commodity borrowers list

Figure_1

With $5B, Noble Group makes the top 4th position on the top 10 commodity borrowers list. Cautionary tale:  We need to know with some precision what Noble are actually using the money for.

Noble is known remarkbly active in the financing market but less in the commodity market.

The struggled acquisition of Noble Agri by Cofco has shown how difficult it is to impose success to a company’s assets with a substantial booked value despite no acceptable performance and very few financial substance (if not any of it).

 

The Noble Files 贵族档案

How the “core assets” (contracts) are now performing ?

In 9 months, Noble’s operations burnt $801m in line with the expectations.

Oil liquids are the core assets of Noble.

One month ago we asked How the “core assets” (contracts) are now performing ? raising serious  doubts about real profitability of the business line  and its line manager.

“Oil liquids had an EBIT of $646M in 2015, thanks specifically to three deals on Colonial, Magellan and Explorer pipelines.

Knowing that:

  • Noble Oil Liquids operates in the [1 – 1.8] % sub-margin band and accounts for more than 70% of the operating income of the supply chains at Noble.

  • Several traders have cut their bilateral opened-credit lines with the “big swinging dick”.

How the “core assets” (contracts) are now performing ? “

oilliquids

Noble Group 9M-16 Investor Presentation

Note the “However, physical and pipeline flows in the various liquids products remained strong”-Strong deals in the  red  should be added.

Noble has confirmed that it is losing money since  at least 8mth on the pipelines as we predicated earlier.

To  get  a good appreciation of the situation, one has to go back 2015 take snapshot 9M2015 and realize that the credit lines have been backed by  the ebitda  indestructibility of the Noble oil  liquids segment.

nobleliquids2015.jpg

Noble Group,  Financial  Presentation, 9M-2015

We are in the lose-lose phase and simply cannot believe the banks will go unprotected warehousing the revolving credit facility (RCF) risks.

The credit swap is pricing a default.

The Noble Files 贵族档案

“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

Continue reading “The Big N”

Bye Bye positive Cash-Flows; Welcome MTM Gains ?

 

Today Noble’s narratives are muttered, find only why.

Refinancing is reported under-subscribed and on highly disadvantageous terms.

Continue reading Bye Bye positive Cash-Flows; Welcome MTM Gains ?

Noble Group’s Cliffhanger

 

 

2010:  Harry Banga splits… most of Noble problems start here.1

2015:  Noble Group, one of the biggest traders of commodities from coal to iron ore is melting from its base.

Script writers have devised the solution of telling us a story  but leaving it at a cliffhanger, thus forcing the market to postpone their execution to hear the rest of the tale.

A villain was designed and a lawsuit with an injunction was filed with the Hong Kong High Court asking to ban his research, hoping to ensure the audience will return to see how the characters would resolve the dilemma.

Continue reading Noble Group’s Cliffhanger