Tag Archives: fraud

This time Noble (來寶集團) will work for itself, not for the banks…

Last year we predicate that refinancing Noble (來寶集團) would be a lose-lose deal in which everyone would end up looking bad.

 

“At some points the Banks must get out, must unload the RCF risk with the red pill and it means that Noble will work for the Banks”.

“This is the equity offering of a company with very questionable or no prospects, transferring risks to retail investors”.

In short, this is a lose-lose deal in which everyone ends up looking bad”.

Refinancing Noble: a Lose-Lose Deal

March 16, 2016 

–  the Noble Files 高贵组文件 研究

The only thing we got wrong in 2016 is that some Banks would still accept to refinance the liabilities of Noble (來寶集團) on the back of an equity raising.

The investors have eaten the red poison pill and we simply overestimated their level of sophistication.

Can anybody look back and say it was good to let Noble raise more than 1.2B in equity offering and bonds ?

  • The 750M bond raised is traded at 40c on the dollar.
  • Equity investors who also subscribed to the 500M share rights issue at 0.20/share are now at 0.03…


Success can’t be imposed on this circus.

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.

Given that the Operating loss is created by a mismatch between the level of profits booked on these derivatives and commodity contracts and their underlying expected cash-flows, the real nature of this MtM can be viewed as an expensive liability that Noble (來寶集團) has to roll-out.

Noble (來寶集團) has even pushed back against guidelines in Singapore for disclosing information on its executives’ remuneration.

Perhaps Noble (來寶集團) needs to raise another 2B to pay coming debt retirement (reassure the lenders that they refinance the fair to arrive net equity on a future solvency basis) – as the book doesn’t generate positive cash-flow since 44 months.

It is no longer a working capital shortfall that we observe but the liquidation of a trader  (virtually silent in the physical market)…

Lenders will choose to roll up credit. IF not, they precipitate a restucturing which is told to be not in the interest of the 2020 and 2018 bond holders (FT).

 noble group fate.png

It should be pretty clear.

This time Noble (來寶集團) will work for itself, not for the banks.

On the road show, Noble has asked the permission to decrease its net equity.

It wants to set its own “term sheet” and its covenants to be relaxed, exactly the opposite wanted by the other side.

4 Banks are long with a $1.5B exposure left with this intermediate situation :

 

 

the Noble Files 高贵组文件 研究

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 Group’s “Fair-value to-arrive equity”.

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.

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