Noble Group

[PkNanas]

CF:
What is the impact of the changed capital structure and liquidity to Noble?
Does it ultimately swing the Credit Agency in re-rating Noble, and in turn lower its funding cost, thus leads to benign funding cycle?

[CityFarmer]

CF:
What is the impact of the changed capital structure and liquidity to Noble?
Does it ultimately swing the Credit Agency in re-rating Noble, and in turn lower its funding cost, thus leads to benign funding cycle?

There are two major challengers facing by the company. The nearer one, is the liquidity. The further one, is the sustainable PnL.

The liquidity, will make an impact on counter-party risk in partnerships, and credit risk with banks. 

After the last debt restructure, from non-secured, moving to secured working capital debts, the re-financing cost remained about the same, even after the last round of re-ratings. If a successful move to a better balanced asset and debt liquidity structure, a re-rating back to previous rating, is just a matter of time. It also mean the finance cost will eventuality reduced.

The less obvious to me, is the PnL, which is related more to macro environment.

Sharing my view. Looking forward to hear your Noble story. 

[CY09]

There is another issue of Noble, though less obvious is in its derivatives.

E.g. Some of Noble's commodities contract like coal is to be redeemed at 55/t and is valued as such in its contracts. The contract expires within the period of 4 years. As of now, coal is in the region of 40+. It is similar to pre booking profits now for future contracts

So noble is banking on a commodities upturn within these few years to ensure they can redeem at this price. If things do not go as plan, Noble will have to take losses and its derivatives cash inflow will reduce; affecting its liquidity.

From my analysis above; which was based on Noble's investor presentation: "Given that Noble still has 2.8 bil more debts to clear by 2020 and that it has 1.8 bil of derivatives cash flow+1.3 bil in cash,"

And quoting Weijian in Hyflux thread:
"In essence, with Hyflux's (read as Noble) stretched balance sheet, she needs alot of things to either remain constant or go right for them, just to ensure results turn out alright. Any other alternate scenarios, and results will go wrong. In the words of Nassim Taleb, its highly leveraged balance sheet depending on future cash flow to satisfy it, is a little bit too fragile,..."

Many things have to go Noble's way to survive post 2020. However if history is to serve as an indicator, it is likely we are going to see a recession in due course before an economic boom. And for a full cycle to materialize in 4 years, from my amateur market analysis, is very difficult. Otherwise to redeem its 2020 bonds, Noble will have to roll over with bank loans or issue new bonds. The latter is an unlikely scenario given the bad press Noble has gone through

[specuvestor]

Noble and Hyflux biz model are different: The former is on working capital which is dependent on their volume of trades (and also function of price of commodities) while the latter is long term capital for their BOT model.

What that means is Noble can effectively scale up or down their business but of course that will affect their volume, while hyflux has to consider their long term cost of capital and return profile.

As I stated before I don't think the contracts are fraudulent after the PwC special audit but people wants to see the $ flow from these contract maturities. They are hedges and hence not dependent on a commodities upturn to book those profits. Problem is whether the counterparty will honor those contracts. It's actually the counterparty risk when it's time to bank the cheque. That's how I understand it.

[CityFarmer]

Noble and Hyflux biz model are different: The former is on working capital which is dependent on their volume of trades (and also function of price of commodities) while the latter is long term capital for their BOT model.

What that means is Noble can effectively scale up or down their business but of course that will affect their volume, while hyflux has to consider their long term cost of capital and return profile.

As I stated before I don't think the contracts are fraudulent after the PwC special audit but people wants to see the $ flow from these contract maturities. They are hedges and hence not dependent on a commodities upturn to book those profits. Problem is whether the counterparty will honor those contracts. It's actually the counterparty risk when it's time to bank the cheque. That's how I understand it.

@CY09

It is more efficient to put my view on the topic, together with Mr. specuvestor's post.

Based on my limited understanding of CT companies, skilled traders has limited (or no) exposure to absolute price risk, by hedging tools i.e. the derivative. At maturity, the company will get its "value-add services" gains, thus the positive cash flow.

I am on Mr. specuvestor's side on the topic. Counter-party risk, is becoming or has became "top risk" in the biz. Lowering the risk exposure in partnership is a common term seen in major CT companies reports.

Thank you

[Clement]

Noble and Hyflux biz model are different: The former is on working capital which is dependent on their volume of trades (and also function of price of commodities) while the latter is long term capital for their BOT model.

What that means is Noble can effectively scale up or down their business but of course that will affect their volume, while hyflux has to consider their long term cost of capital and return profile.

As I stated before I don't think the contracts are fraudulent after the PwC special audit but people wants to see the $ flow from these contract maturities. They are hedges and hence not dependent on a commodities upturn to book those profits. Problem is whether the counterparty will honor those contracts. It's actually the counterparty risk when it's time to bank the cheque. That's how I understand it.

Hi Specuvestor,
 
I agree that the contracts are most likely not fraudulent. However, I think some of them might be onerous.
 
There have not been many details disclosed on the contracts themselves, but for the example given by CY09, those are physical delivery contracts and not hedges. From the 2015 Annual report, it is disclosed that the majority of these derivatives are contracts for physical delivery. From the PWC review, it can be surmised that the majority of the physical contracts are off-take and marketing agreements with producers.
 
This leads me to believe that the bulk of the contracts are actually promises to deliver cash for commodities at various points in the future (kind of like a swap), at either a fixed price or a discount to the future market price. The positive cash flow of such contracts will have to come from successfully selling the commodity and realizing the off-take discount from producer and physical delivery premium from the customer.

[CityFarmer]

Noble and Hyflux biz model are different: The former is on working capital which is dependent on their volume of trades (and also function of price of commodities) while the latter is long term capital for their BOT model.

What that means is Noble can effectively scale up or down their business but of course that will affect their volume, while hyflux has to consider their long term cost of capital and return profile.

As I stated before I don't think the contracts are fraudulent after the PwC special audit but people wants to see the $ flow from these contract maturities. They are hedges and hence not dependent on a commodities upturn to book those profits. Problem is whether the counterparty will honor those contracts. It's actually the counterparty risk when it's time to bank the cheque. That's how I understand it.

Hi Specuvestor,
 
I agree that the contracts are most likely not fraudulent. However, I think some of them might be onerous.
 
There have not been many details disclosed on the contracts themselves, but for the example given by CY09, those are physical delivery contracts and not hedges. From the 2015 Annual report, it is disclosed that the majority of these derivatives are contracts for physical delivery. From the PWC review, it can be surmised that the majority of the physical contracts are off-take and marketing agreements with producers.
 
This leads me to believe that the bulk of the contracts are actually promises to deliver cash for commodities at various points in the future (kind of like a swap), at either a fixed price or a discount to the future market price. The positive cash flow of such contracts will have to come from successfully selling the commodity and realizing the off-take discount from producer and physical delivery premium from the customer.

Let me contribute, before further comment from Mr. specuvestor.

I reckon, the "physical delivery contracts" (from producers), should match with a "physical delivery contracts" (to consumers), as part of risk management. Noble earns the service fee from the matching. Long-term open contracts, do not sound good to professional traders, IMO.

The argument on derivatives, is on the valuation, as a mean to make nicer balance sheet.

[Clement]

Noble and Hyflux biz model are different: The former is on working capital which is dependent on their volume of trades (and also function of price of commodities) while the latter is long term capital for their BOT model.

What that means is Noble can effectively scale up or down their business but of course that will affect their volume, while hyflux has to consider their long term cost of capital and return profile.

As I stated before I don't think the contracts are fraudulent after the PwC special audit but people wants to see the $ flow from these contract maturities. They are hedges and hence not dependent on a commodities upturn to book those profits. Problem is whether the counterparty will honor those contracts. It's actually the counterparty risk when it's time to bank the cheque. That's how I understand it.

Hi Specuvestor,
 
I agree that the contracts are most likely not fraudulent. However, I think some of them might be onerous.
 
There have not been many details disclosed on the contracts themselves, but for the example given by CY09, those are physical delivery contracts and not hedges. From the 2015 Annual report, it is disclosed that the majority of these derivatives are contracts for physical delivery. From the PWC review, it can be surmised that the majority of the physical contracts are off-take and marketing agreements with producers.
 
This leads me to believe that the bulk of the contracts are actually promises to deliver cash for commodities at various points in the future (kind of like a swap), at either a fixed price or a discount to the future market price. The positive cash flow of such contracts will have to come from successfully selling the commodity and realizing the off-take discount from producer and physical delivery premium from the customer.

Let me contribute, before further comment from Mr. specuvestor.

I reckon, the "physical delivery contracts" (from producers), should match with a "physical delivery contracts" (to consumers), as part of risk management. Noble earns the service fee from the matching. Long-term open contracts, do not sound good to professional traders, IMO.

The argument on derivatives, is on the valuation, as a mean to make nicer balance sheet.

Hi CF,

It is just my hypothesis, based on my understanding of the commodities trading business and the following.

1) The annual report discloses that the bulk of the derivatives are physical contracts.

2) Page 3 of the PWC report, which reviewed 81% of derivative contracts with duration 2 years or longer, states 
"The relevant activities undertaken by Noble for the purposes of this report consist of long dated agreements with physical commodity producers. While the terms of these contracts are very specific to each individual agreement, in essence they are either (a) ‘off-take’ contracts, under which the producer typically agrees to sell the contracted amount to Noble at an agreed discount to the market price (such as a commonly-used benchmark price) at the time of delivery, or (b) ‘marketing’ contracts, under which Noble is paid a fixed percentage of the price achieved for assisting the producer in selling the contracted amount at then-prevailing prices." 

3) In the 4Q15 investor presentation, Noble disclosed that the derivatives are valued with a 20% discount rate. It is difficult for me to believe that Noble is unable to get a strategic investor or some other form of financing besides the rights issue, if the bulk the derivative contracts are contracts to receive cash-flows in the future valued at a 20% discount. It would make sense if the contracts require Noble to put up cash in the future and try to sell the resultant inventory to realize the fair values.

[CityFarmer]

Hi CF,

It is just my hypothesis, based on my understanding of the commodities trading business and the following.

1) The annual report discloses that the bulk of the derivatives are physical contracts.

2) Page 3 of the PWC report, which reviewed 81% of derivative contracts with duration 2 years or longer, states 
"The relevant activities undertaken by Noble for the purposes of this report consist of long dated agreements with physical commodity producers. While the terms of these contracts are very specific to each individual agreement, in essence they are either (a) ‘off-take’ contracts, under which the producer typically agrees to sell the contracted amount to Noble at an agreed discount to the market price (such as a commonly-used benchmark price) at the time of delivery, or (b) ‘marketing’ contracts, under which Noble is paid a fixed percentage of the price achieved for assisting the producer in selling the contracted amount at then-prevailing prices." 

3) In the 4Q15 investor presentation, Noble disclosed that the derivatives are valued with a 20% discount rate. It is difficult for me to believe that Noble is unable to get a strategic investor or some other form of financing besides the rights issue, if the bulk the derivative contracts are contracts to receive cash-flows in the future valued at a 20% discount. It would make sense if the contracts require Noble to put up cash in the future and try to sell the resultant inventory to realize the fair values.

No problem, both of ours, are hypothesis   Let's validate them, with logic and facts, as far as we can.

I am not surprised by the fact, most of the derivative are physical contracts. Isn't it the role of CT companies, unlike financial institutions? The main role of CT companies is to move physical goods around globally with paid services.

It took me some time to get a reasonable hypothesis, for the (3). The purpose of the restructuring is to re-balance the liquidity. Derivatives, are part of working capital. No working capital, means no biz for CT companies. The asset-light strategy, is a viable means to reduce the debt, but equity raising is necessary for a more sustainable capital structure, IMO. Of course, it can be right issue, or strategic investor. Noble had chosen the right issue, probably a "quicker", "cheaper" and "safer" solution for Mr. Chairman then.

[Clement]

Hi CF,

It is just my hypothesis, based on my understanding of the commodities trading business and the following.

1) The annual report discloses that the bulk of the derivatives are physical contracts.

2) Page 3 of the PWC report, which reviewed 81% of derivative contracts with duration 2 years or longer, states 
"The relevant activities undertaken by Noble for the purposes of this report consist of long dated agreements with physical commodity producers. While the terms of these contracts are very specific to each individual agreement, in essence they are either (a) ‘off-take’ contracts, under which the producer typically agrees to sell the contracted amount to Noble at an agreed discount to the market price (such as a commonly-used benchmark price) at the time of delivery, or (b) ‘marketing’ contracts, under which Noble is paid a fixed percentage of the price achieved for assisting the producer in selling the contracted amount at then-prevailing prices." 

3) In the 4Q15 investor presentation, Noble disclosed that the derivatives are valued with a 20% discount rate. It is difficult for me to believe that Noble is unable to get a strategic investor or some other form of financing besides the rights issue, if the bulk the derivative contracts are contracts to receive cash-flows in the future valued at a 20% discount. It would make sense if the contracts require Noble to put up cash in the future and try to sell the resultant inventory to realize the fair values.

No problem, both of ours, are hypothesis   Let's validate them, with logic and facts, as far as we can.

I am not surprised by the fact, most of the derivative are physical contracts. Isn't it the role of CT companies, unlike financial institutions? The main role of CT companies is to move physical goods around globally with paid services.

It took me some time to get a reasonable hypothesis, for the (3). The purpose of the restructuring is to re-balance the liquidity. Derivatives, are part of working capital. No working capital, means no biz for CT companies. The asset-light strategy, is a viable means to reduce the debt, but equity raising is necessary for a more sustainable capital structure, IMO. Of course, it can be right issue, or strategic investor. Noble had chosen the right issue, probably a "quicker", "cheaper" and "safer" solution for Mr. Chairman then.

I agree that it is not surprising that the contracts were mainly for physical delivery, i just wanted to point out that they are contracts obligating Noble to pay cash and do not in themselves result in positive cash-flow. 

If fully hedged and facing no commodity price exposure, a commodity trader makes money by earning the physical delivery premium over a benchmark price and, if possible, paying below the benchmark price for the commodities it procures. Fluctuations in the spot price itself can be hedged, maybe not perfectly but adequately, in the futures market or through cash settled contracts. Given that Noble chose to pursue an asset light model, which involves minimal investments in mining / production assets, the off-take / marketing agreements are needed to secure supply below spot prices. I wouldn't equate them to working capital but capital commitments.