SINGAPORE (Feb 12): Commodities trader Noble Group’s plans to improve its balance sheet have come under a barrage of criticism. One major shareholder, Goldilocks Investment, has written a letter to the Singapore Exchange. Those who hold the company’s perpetuals have voiced unhappiness that they will receive less than 4% of the face value of their investment. And Iceberg Research, an online outfit that has heavily criticised Noble, has urged creditors to reject Noble’s restructuring plan.
The negative reception is to be expected. Noble’s deal, announced on Jan 29, allows an “ad hoc group” of senior creditors that holds US$3.4 billion ($4.5 billion) of its debt obligations to swap their debt for a combination of new debt instruments and equity in a restructured company. The arrangement will substantially dilute existing shareholders. In addition, Noble intends to offer up to US$15 million in aggregate to those who hold its US$400 million in perpetuals.
Noble’s plan requires regulatory and shareholder approval, so the company may be in need of a charm offensive. It has already issued two rebuttals to the allegations raised by Goldilocks. And the company recently met with representatives from the Securities Investors Association of Singapore (SIAS). Will it get the approvals it needs? Do shareholders and creditors have other viable options?
Three separate entities
Under the proposed deal, Noble would be restructured into three separate entities. Creditors would receive new debt issued by each entity while shareholders would own a holding company that owns all three entities.
A Trading Co will be formed to control and operate Noble’s core businesses of hard commodities, freight and LNG. It will issue US$685 million worth of senior secured debt due in 4½ years. A Trading Hold Co will be formed to become the holding company of Trading Co. It will issue US$270 million worth of senior secured debt due in seven years. An Asset Co will be set up to hold Noble’s interests in Harbour Energy, Jamalco, Noble Plantations and assets such as vessels. It will issue US$700 million in asset-backed bonds due in 3½ years. It will also issue US$200 million worth of preference shares.
Ninety per cent of these preference shares will be issued to a Topco. This company will also have effective interest in Trading Co and Trading Hold Co. Topco will issue new shares, with 70% of these shares going to creditors. Management will own 10% at first, with another 10% to be sold to management later by way of a shareholder loan and contingent upon the meeting of performance targets. Existing Noble shareholders will end up with just 10% of the company. Noble’s existing senior debt would be halved to US$1.7 billion.
Shareholding changes
The most significant issue is that of changes in the shareholding structure of Noble. Farhana Siddiqui, a partner at Withers KhattarWong, says giving creditors an equity stake in Noble could be seen as a positive for existing shareholders. “I think one way to look at it is that while creditors’ and shareholders’ interests are often not aligned, hopefully [when] the creditor also becomes a majority shareholder, there is more impetus from a shareholding perspective to keep the company alive rather than winding it down,” she tells The Edge Singapore by phone. “Yes, they [will be] diluted. But if they are diluted into a company where the liquidity improves and the share price improves, that’s far better than being stuck in a company that has no value and is at risk of being wound up.”
As part of the debt-for-equity swap arrangement, Noble will also issue equity to “retain and incentivise the group’s management team”. Goldilocks had taken issue with this dilution, complaining that the company’s management seemed to prioritise their own interests over those of existing shareholders.
Meanwhile, Iceberg says retention of management is a bad idea. “Managers who created billions of fake profit won’t find it hard to reach their targets,” Iceberg says in a Jan 27 post on its website. “The people who are the cause of this scandal will remain shareholders… The same structural issues that have plagued this company will remain in the future.” Iceberg has counselled creditors to reject the restructuring proposal and demand much tougher conditions to safeguard their interests. “Noble’s management has no choice and will be forced to accept,” it says.
For its part, Noble is trying to press the point that giving management a stake is in the interest of shareholders. At the recent meeting with SIAS, Noble had explained that the ad hoc credit group expressed a preference for retaining the current management. The creditors said management “was an important factor in providing the group with the best prospect of a turnaround over the medium to long term”, according to a SIAS statement. The statement also says that the current plan “aligns management and shareholder interests”.
Holding out for more
Meanwhile, legal action may be brewing. Iceberg has proposed that creditors seek legal advice. “Creditors (especially the perpetuals) who think they have been duped by Noble can contact us. We know the right law firm to assist them,” Iceberg tweeted on Jan 30.
At least one individual appears to be rallying those holding Noble’s perpetuals to hold out for full value. Tweeting at “@noble_perpetual”, the individual has garnered 55 followers — although that number includes a few journalists. “Noble Group Perpetual Bonds rank higher in priority than shares, therefore current shareholders and Noble Group ‘mismanagement’ team shall not get a penny before perpetual bondholder is repaid in full,” the individual tweeted on Jan 30.
Where would Noble find the money to repay perpetual holders? For 9MFY2017 ended Sept 30, the company reported a 23% y-o-y decline in revenue from continuing operations to US$5 billion. Its net loss widened substantially to US$3.1 billion, from US$42.5 million a year ago. It generated negative operating cash of US$477.7 million.
A former commodities analyst says that even if Noble is able to execute its restructuring plan, it will still need to generate cash to meet its obligations. And for that, it will need a “fairly benign” commodity environment.
At present, the prices of several of the hard commodities that Noble deals in are trending higher. That could prove a double-edged sword. In theory, a steady increase in prices should make it easier for traders to profit. They can buy commodities at a lower price and sell them on later for more. But higher prices also mean that a trader needs more capital.
In its recent quarterly announcement, Noble highlighted that “conservative liquidity management and constraints placed on the group’s access to trade finance lines led to disruption costs and prevented the group from taking advantage of profitable trading opportunities”.
To stay in business, Noble will also need to retain the services of its best traders. But the former commodities analyst points out that Noble has reduced its headcount significantly in previous restructuring moves. “So, the question is: Do they still have the [right] personnel?” he says.
Shareholders can expect to see Noble do more to court their approval. In its statement, SIAS says it has been assured that the Noble board and management will remain “committed” to an “open and ongoing dialogue” with shareholders, irrespective of the size of their individual holdings. Once the restructuring has advanced, a town hall gathering will be held. It will be hosted by SIAS.
Shares in Noble closed at 21.5 cents on Feb 7, down 87.8% in the last 12 months.
