Noble Group's "Margin Call" Part II: The Enron Moment

"Our balance sheet - the strongest in recent history - represents a significant advantage as we continue to identify high value growth opportunities across the products and geographies we operate in. Maintaining our investment grade rating with the international rating agencies is a vital part of this strategy."

      - Noble Group 2014 Annual Report, p. 27

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"Moody's Investors Service has downgraded Noble Group Limited's senior unsecured bond ratings to Ba1 from Baa3 and the provisional rating on its senior unsecured MTN program to (P)Ba1 from (P)Baa3."

      - Moody's, December 29, 2015

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"Noble Group Downgraded To 'BB+' On Weakened Liquidity; Notes Lowered To 'BB'; Ratings Still On CreditWatch Negative"

     - Standard & Poors, January 7, 2016


Noble's "Margin Call" Part II - The Enron Moment

By Simon Jacques

The story of Noble is worth writing a book, mostly of how not to run your business. 

If they are in this mess, it is in large part because the management was comprised predominantly of traders who were predisposed to defend their books.

Noble has been desperately trying to revive their image by hiring former Goldman, JP. Morgan, Trafigura executives etc. By doing so they were looking for a form of credibility collateral.

It didn’t work well for the new employees as they rapidly found out that they inherited from the liabilities of one decade of Noble’s poor decision making of the hard-core asset guys like William J. Randall and ex-Goldman Sach banker Yusuf Alireza.

In the part II of this analysis we will review the gap between the liquidity headroom and the debt maturity profile of the trader and explain how Noble Group will have its Enron moment.

The fatal mistake that Noble Group did was apparently to mislead the market about their financial performance "presumably" by using accounting devices.

During last November, Noble Group's chief financial officer Robert van der Zalm has stepped down from his position after taking a leave of absence for “health reasons”.

Two months later,  Moody’s downgraded Noble Group.

In a very awaited decision, Standard & Poor’s has finally lowered Noble Group’s to junk, placing Asia’s largest commodity trader on watch for further possible as the rating agency remains skeptical about the liquidity headroom of the trader.

According to Noble Group, on September 30th 2015, the company had  $15.5bn banking facilities and $1.669B in RMI (ready marketable inventories).

  • $11.1bn of these $15.5bn banking facilities is uncommitted and are contingent on ability of maintaining investment-grade rating in the future.
  • Noble claims to have $900M of cash and 1.669B$ in RMI (ready and marketable inventories).
  • Their 1.669B$ in RMI have claims on related- party notes that are under collateralized by their commodity merchant activity and therefore should be excluded from their liquidity headroom.
  • Noble Group currently uses $3.4B of borrowing facilities that are uncommitted.

Noble Group is left with only 1B$ of unutilized committed borrowing facilities and $900M of cash ready available to meet $2.966B of debt scheduled in the next 12 months.

Source: Noble Group MD&A Q-3 2015

Moreover, Noble Group counts on the completion of the Noble Agri stake divesture to reap $750M, a transaction which may not be completed by February 2016.

Adding the 1B$ of unused uncommitted borrowing facilities plus the $750M of Noble Agri and the $900M of cash that Noble claims to have, Noble is still short by $316M.

With the S&P downgrade, the total collateral margin call on Noble Group could be as much as $3.4B, banking facilities that are uncommitted and contingent on the ability of maintaining their investment-grade rating.

Noble will have its Enron Moment.

Enron's bankruptcy occurred on November 2001 and was triggered by S&P's downgrade of its debt below investment grade, activating a call provision in some loan indentures with principal amounts totaling $4 billion, cash and liquidity that suddenly Enron didn’t have.

After the quick sale of Noble Agri, Noble’s core business remains its coal & energy – two very depressed commodities for the foreseeable future, and with no cash-flows to pay its debt and a sudden tightening of the credit, the trader is a cancer patient on the forward curve.