Noble Group

[Behappyalways]

From The Economist


Noble Group

Nobbled

A big Asian commodity-trader is attacked by an anonymous online critic

Mar 14th 2015 | From the print edition

RICHARD ELMAN has lived quite a life. He began as a scrap-metal trader in London, then found himself trading commodities in Hong Kong in the 1970s. Today he is chairman of Noble Group, a global trading firm that he founded in 1987 and which deals in everything from American shale gas to Brazilian sugar. It was named after “Noble House”, a novel by James Clavell about the then-British colony that featured ruthless tycoons living by their wits.

The latest chapter in Mr Elman’s career could easily belong in a blockbuster. On February 15th an unknown outfit called Iceberg Research, with no presence other than a website and a Twitter account, began a campaign alleging that Noble’s accounts give an unduly rosy picture of its condition. Noble’s shares have tumbled by 24% so far. Iceberg says that it does not stand to profit by this decline and that it is acting for the greater good.

Noble is in some ways an unlikely target. Its annual sales are $86 billion. Its board is stuffed with the great-and-good of Hong Kong; it is audited by EY, an accounting giant; and its shares are listed in Singapore, perhaps Asia’s best-run financial centre. Yet two of Iceberg’s criticisms have bite.

The first is that Noble has overvalued in its balance-sheet an investment in an Australian coal miner. On February 26th Noble wrote down much of the value of this position, booking a non-cash charge of $200m.

The second criticism is potentially more serious: that a chunk of the profits Noble reports comes from non-cash gains created by “marking to market” long-term contracts (eg, to supply coal) and derivatives it holds. Iceberg is not accusing Noble of fraud, but it is questioning how realistic these valuations are and asking how much of the company’s reported profits are the result of this practice. Noble reported that at the end of 2014 the net fair value of these positions was $4.6 billion, equivalent to 91% of its book value.

It is hard to tell from what Noble discloses in its accounts whether its valuations are indeed fair; and since it is also unclear how much of its profits come from such changes in valuation, it is difficult to assess how robust its profits are. Noble did not respond to requests from The Economist for comment. The firm’s cashflow has been weak. Over the past three years it has booked net profits of almost $1 billion but negative cashflow of almost $2 billion, after working-capital, capital-investment and interest costs.

Noble has launched a defence of sorts. Its top brass have bought shares in the firm, presumably to signal their confidence in it. On March 5th it issued an 11-page rebuttal, suggesting that a disgruntled ex-employee was behind Iceberg. It also gave more detail about the “fair value” positions. They reflect over 12,000 individual contracts, almost half of which mature within two years. Over the past three years the firm has realised $800m of cash from such positions. Yet the rebuttal omitted a vital piece of information: how much profit has been booked from these positions. Without this nugget it is hard to form a sensible judgment about Noble’s books or health.

Even if its shares fall further, Noble can service its debts—it has $2 billion falling due in the next two years, against about $5 billion of liquidity in the form of cash and bank facilities. Standard & Poor’s, a ratings agency, has said it is comfortable with its “BBB-” rating of the firm. Yet Noble also needs to command the confidence of its trading counterparties around the world. And the price of credit-default-swaps on Noble, which insure against the risk of default, have ballooned, according to Bloomberg, an information service. That suggests the firm needs to offer a better explanation of how its accounts work—and soon.