If you are a so-called parent company – you likely have some subsidiaries in your books. These subsidiaries can be either qualified as;
- an Entity with majority stake and control (100% – 50% ownership),
- an Associate with significant control (50 – 20%) or
- as a long-term investment (20% – 0%).
For instance, Noble Group held a 13% stake in a listed Australian coal miner named Yancoal. It classified the company as an “Associate” on its balance sheet despite failing to meet the 20% ownership threshold.
Noble Group defended itself by stating it has “significant influence” over its subsidiary. However, with 77% of the remaining Yancoal stocks in the hands of Chinese state-owned company Yankuang without any clear management or supply chain connections – this became a rather questionable assumption.
As such, Noble Group falsely treated the value of Yancoal under a self-estimated cost-basis rather than on the market-implied value.
In Noble Group’s books, the self-estimated carrying value of Yancoal was $614m 2014 at a lousy 38x earnings multiple.
The 13% stake in ASX-listed Yancoal had a market value of only $11m… This meant that the carrying value is 55x the market cap of the 13% stake Yancoal.
How did E&Y, the auditors, allow this?
EY, well aware of the issues, wrote a note in the annual report to avoid future legal liabilities.
“At initial recognition, the investment in Yancoal was measured at fair value estimated based on a discounted cash flow model. Determining the value for this investment required the Group to make certain estimates and assumptions on expected sales and production volume, future sale prices, expected future costs and expenses. Actual outcomes could differ from these estimates and assumptions.”
-Noble Group 2012 annual report
However in the 2013 annual report, EY wrote:
“$577M “accounting adjustment” between the carrying value and “the group’s share of net assets of the associate”.
Equity Bubble Falloff
There was indeed more to be seen. Iceberg Research found USD 212m of mistreated operational improvements in Noble’s Agri subsidiary with key drivers being an unexplained increase in deferred tax assets with unexplained decrease in depreciation, holding subsidized selling, administrative and operating expenses (“SAO”) with an unexplained decrease in financing costs.
As the new information about the company revealing its true nature was disseminated to the market it was gradually written-off from -50% to -99%…
For a few banks however, it was an alert to save their outstanding trade finance facilities collateral from defaulting.
With S&P still showing an inflated single-B rating, the banks HSBC, ING N.V, Morgan Stanley and Societe Generale felt confident in raising USD 750 million carrying a coupon of 8.750% Mar ’22 just in time ahead of troubling Q1 2017 results.
Noble 8.75% issued the 2022 (750M USD) and timed a -1.8B loss result only one quarter after…
Post-results, the bond was downgraded to absolute junk-status CCC, wiping out almost its entire value…
In March 18, Noble Group could not make the 8.75% coupon payment on the said bond and defaulted on the 2018 $394M bond.
The head of ING commodity finance would later postured “our bank suffered no losses”.
September 2018: Noble Group is -902M under, –1.017B negative equity if we account the new non-cash gains they took on Harbour…
In Noble Group, both the Assets and Profits are inflated.
“In the U.S, it is no different. Noble Americas Corp, Frase & Co were making a profit… and another unit was writing a loss ?! They seriously underestimated/misstated the financing costs of their P&L to maintain the borrowing base intact… “
As such, it’s bogus. The banks financing Noble are only tourists.
For example, in the mind of a Managing Director of the Shipping at Noble his division was making a profit on forward contracts (it’s the group trading “shipping at a loss”). Terrific company !
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The Noble Files 贵族档案
The Noble Files 