Third report on Noble Group, a repeat of Enron: Governance, debt and liquidity headroom
Summary of findings:
There are an impressive series of red flags drawn when reviewing Noble’s governance: independent directors on the board for 19 years, key shareholders and staff leaving the company, “negative assurance” no longer found for FY2014 financials, the high number of reservations expressed by the auditor in the annual report, etc.
Noble substantially understates both its gross and net debt, for example it omits the corporate guarantee to Agri against which new debt was raised. Noble also calculates its net debt by using cash they have no access to. We found Noble’s gross debt to be 41% higher than reported, and net debt 64% higher than reported.
Noble claims that $2.2b inventories could be used for debt repayment while there are $8.1b suppliers with exactly the same level of claim on those inventories. We explain why using inventories to repay banks and bond holders would immediately trigger Noble’s bankruptcy.
We estimate that after adjustments, the major financial covenants are breached.
In addition, Noble intensively engineers its level of debt at reporting date with what we believe is the help of heavy repos disguised into regular sale and purchase.
The concept of liquidity headroom, a cornerstone of the investment grade for credit agencies, is based on a series of misconceptions that we explain.
After impairments and using a price-to-book valuation method, we find a valuation of S$0.1 per share
Our conclusion summarises the comparison between Noble and Enron.
Noble Group Receives Another Chilly Critique From Iceberg
Little-known research firm says Singapore-listed commodities trader has ‘engineered’ lower level of debt
JAKE MAXWELL WATTS
Updated March 21, 2015 7:14 a.m. ET
SINGAPORE—Noble Group Ltd. on Saturday was subjected to fresh allegations from Iceberg Research, a little-known firm that last month accused the Singapore-listed commodities trader of accounting irregularities, leading to panic selling of the stock by investors.
Iceberg Research said in its third report that, in addition to other accounting irregularities, Noble Group had “engineered” a lower level of debt in its financial reports. The firm also challenged Noble Group’s standards of governance.
Iceberg said that it calculated that Noble Group’s net debt should be 64% higher than the company has reported, and that if the commodities trader attempted to service its debt with inventories, it would trigger bankruptcy.
The research firm also accused Noble Group’s directors of lacking independence. “Either their willpower is so strong that they have extremely independent minds, or they are de facto employees,” Iceberg said in its report. “The way these independent directors are remunerated guarantees that they will never rock the boat.”
“We are aware of the report and are reviewing it,” a Noble Group representative said.
Noble Group has previously denied any wrongdoing and defended its accounting methods. In earlier statements, the company has assured investors that its accounts have been signed off by independent auditors and followed internationally accepted accounting procedures.
Noble Group’s shares have fallen as much as 29% since Iceberg released its first report on Feb. 15. They closed Friday 2.9% higher after institutional investor Prudential PLC and its asset-management arm Eastspring Investments (Singapore) said they had become substantial shareholders by building their stake in the commodities trader to more than 5%.
In previous reports, Iceberg claimed that Noble Group overstates the value of its holdings in associated companies and that the unrealized gains it records on its contracts aren’t matched by its actual cash flow. It has likened Noble to U.S. commodities-trading company Enron Corp., which filed for bankruptcy in 2001 amid questions about its own accounting methods. In its full-year 2014 results, released the same day as Iceberg’s second report, Noble Group took impairments of US$438 million on its associate companies.
“Noble Group is a repeat of Enron,” Iceberg said in its third report. :Both companies use similar actions in an attempt to deceive investors. Noble, like Enron, misrepresents the three components of its financials: income statement, balance sheet and cash flow statements.”
In a letter to stakeholders after the previous reports, Noble Group Chief Executive Yusuf Alireza said he regretted any stress that had been caused by Iceberg’s allegations. “We unfortunately live in a world where knowing that you run your business professionally is not good enough. You need to be able to prove it,” he said. The company has also released a 10-point response to Iceberg’s previous allegations, explaining why it disagreed with the conclusions and defending the company’s integrity.
Iceberg’s allegations against Noble Group mark the second time in just over two years that a commodities company in Singapore has faced queries over its accounting practices.
In 2012, U.S.-based research firm Muddy Waters alleged agricultural commodities traderOlam International Ltd. was at risk of insolvency, triggering a sharp fall in the company’s share price. Olam responded by a launching a suit against Muddy Waters alleging the research firm had committed libel and slander. Olam dropped the suit in April 2013 saying it had found no assets against which a claim against Muddy Waters could be made.