Noble Group’s "Collateral Margin Call"

By Simon Jacques

Noble Group’s "Collateral Margin Call"

The downgrade of Noble Group by Moody’s depicts an aggressive financial risk and a vulnerable business risk profile

I) the first-order problem is Macro.

"The downgrade of Noble Group to junk status is worrisome, but the main story is about the evolution of the commodity price downtrend. 1st round effects were felt in macro indicators (lower CapEx & growth for producers and following FX/interest rate adjustments). 2nd round effects will be about commodity exporters' governments reactions."

Those effects will dominate in 2016 said Sacha Duparc, Head trader and structurer at Banque Cantonale Vaudoise.

II) Collateral margin call.

The trader has billions of dollars in commodity prepays with NOCs and producers and the value of inventories and receivables collateralized by traders into trade finance arrangements have cratered in the past year.

This collateral value of Noble Group is being depressed, those loans are been called even if Noble Group (buoyed by liquidity in 2015) never missed a payment because the market knows that Noble’s assets are worth less they claim on their books.

Banks are requiring at least 1.6 B$ more in additional collateral, equity that Noble Group hasn’t built over the good commodity years…

Noble is being placed into either bankruptcy or they are been place in a tremendous economics adversity that so far they've not seen in 2015.

"People have been hopeful that Noble might avoid a rating downgrade after the asset sale but it couldn’t,” said a Hong Kong-based credit trader at a Japanese investment bank.

Noble's move to raise US$750 million by selling its remaining stake in Noble Agri. I repeat what was said in a previous comment: Noble Agri Sale was strictly a Collateral margin call.

Noble Group must raise money but their collateral base is new book value of 4,528 million while their Net Positive fair values gains of commodity contracts and derivatives exceeds MTM is over 4,500 million…

By any model, this MTM represents between 90% and 105% of their book value.

Banks aren’t provided with the access of the exact breakout of the 4,500 million and PwC has not been able to review the exact assumptions and models behind these Net Positive fair values gains of commodity contracts and derivatives. Perhaps, Antoine Lavoisier, French nobleman of the 18th century and father of modern chemistry must have a great influence on the financial reporting of Asia’s Largest Commodity trader with "Nothing is lost, nothing is created, and everything is transformed".

Solvency Problem, not liquidity

I will make it clear that it is not Liquidity that banks are asking but for more Collateral from Noble starting this year because they also understand that this MTM gain on commodity contracts and derivatives of Noble will unlikely be realized at more than 10% and therefore is not valid collateral for the trader’s working capital borrowing base requirements.

A close friend hedgie in NY reminded me that at the height of 08', a IB sale desk lured them into "taking a position into undervalued trading books of the bank temporarily mispriced because of market illiquidity". At only 66 cents on the Dollar, the deal turned-out to be 0.6 cent sinky.

Enron-esque memes

To put Enron in the context of 1999-2001s, it was not only the world’s largest energy trader; it had also the same gleaming and appeal of the Trafiguras or Vitols of today.

A trading or a mgmt position at Enron meant that you could do a 6 digits salary and touch a 7 digits bonus. Most of it was a management incentive program with the Enron Corp share derivatives used as a currency.

Many people at other firms were lured into mgmt and trading positions by commodity headhunters hired by Enron Corp providing "an offer that nobody could refuse" just months before the collapse.

There are some parallels with Noble Group, one I guess is that Noble recently brought new faces people from other firms in Geneva like Kev Brassington into offers that they could not refuse in their career path.

Enronesques parallels with Trafigura.

Medias have recently bragged about “$775m bonuses” to 600 of Trafigura employees related to bumper profits from oil trading”. However I note in the disclaimer that's as an all stock 5 year LOCK buyback type program, again something tied to its future performance and the commodity curve.

When Enron collapsed, the story that I know is that an average trader and VP have registered 7 digits each (real losses), so it is fair to say that VPs, Management and traders were also conned. More than financial losses, can you think about the moral damages that they still endure because they spent between 12 and 6 months at Enron ?