Noble Group, the Singapore-listed trading group, started in 1986 by ex-Phibro trader Richard Elman, once had aspirations to rival commodities trader and miner Glencore and oil trading giant Vitol.
But this week the firm narrowly avoided bankruptcy in a refinancing deal which sees Elman lose control as his creditors take a debt-for-equity swap and holders of $400 million of perpetual bonds are almost being wiped out with a $15 million payout, less than $0.04 on the dollar.
All the traders hit the financial rocks when the commodities markets collapsed earlier in the decade, but some moved swiftly to sell assets, pay down debt and slash costs – think Glencore, which today is thriving and cautiously back on the acquisition trail.
Noble, according to The Telegraph, made some bad hires and instead of cutting its cloth, it carried on with a debt-fueled acquisition spree that started at the turn of the decade but was increasingly facing cash flow issues.
As markets weakened, debt costs became crippling. The firm’s share price was hit last year by critical reports emanating from an obscure firm called Iceberg Research, rumored to be run by an ex-Noble employee, which accused the firm of using “aggressive” – though not illegal – “accounting” to “avoid large impairments and fabricate profit.”
The crux of Iceberg’s case, according to The Telegraph, was that Noble booked profits in advance that were higher than the actual cash it received. Noble’s cash flow declined and, despite launching a $500 million rights issue backed by Elman and China’s sovereign wealth fund, the China Investment Corporation, the shares continued to slide.
Today, they are down 96% from their level in February 2015.
It appears as if the firm will survive, but in a much-reduced form, focusing on trading thermal coal, liquid natural gas and dry bulk freight in Asia, largely retrenching to it roots as a supplier of coal from Indonesia to China, where Elman started the firm in 1987 in Hong Kong with just $100,000.
Elman’s story is not just a classic tale of rags to riches; it has similarities to the origins of many great trading houses.
Aged just 15, he started in a scrap yard in the U.K. and moved out to Hong Kong as the market began to open up in the 1960s. His first venture was sold to Phibro in 1972, yet he continued to work for them for over 10 years before starting Noble. According to The Telegraph, after listing in Singapore in 1997, a wave of acquisitions followed, notably the grains business of Swiss trader André & Cie in 2000.
Money was cheap and Noble went on to buy up warehouses, coal mines, ports in Argentina, and stakes in iron ore miners in Brazil and Australia. By 2010, it had a market cap of $10 billion (£7 billion) and a presence in 40 countries. Maybe Elman hung onto the reins too long, maybe he didn’t bring in enough depth of experience at board level to manage the transition to global player and challenge some of the decisions made. There may yet be a Hollywood interpretation of events in the years to come – it would make quite a story.
But vindictive as Iceberg Research’s campaign appears, they may well have been right in terms of reporting and underlying profitability. The resulting collapse in the share price only brought to light the lack of cash flow cover and poor profitability.
Good governance makes strong companies, however tempting the idea of short cuts may at times seem.