For decades, there was no better way to profit from the rise of value-added manufacturing in Asia, particularly in China, than to invest in Singapore-listed Noble Group. Its ships tied the region's supply chains together as they transported raw materials from Australia, Indonesia and India to East Asia, where they were processed into white goods, black goods and the electronic gadgets craved by developed markets in the West.
But at the worst possible time, just as the 2008 global financial crisis was building up, Noble switched from being an asset-light trading company to an asset-heavy commodities business. Rather than improving its circumstances, it was squeezed from both sides. It lacked the high credit ratings needed to inspire confidence in the financial markets, while its assets were losing value by the day as demand from China dwindled.
In addition, Noble missed the biggest secular trend of the new millennium, China's shift from its manufacturing-for-export model to a more domestically driven service economy. Noble's debts are now too big to be supported by its cash flow. Its share price has fallen from a recent high of 11.18 Singapore dollars on June 5, 2014, to S$0.36 on the Singapore Exchange on Aug. 8, according to QUICK-FactSet.
Almost all trading and commodities groups are facing significant challenges in the face of a fall in demand for commodities and a reduction in the movement of goods as physical activity becomes less valuable than its virtual counterpart. Data rather than oil has become the most precious resource. Technology is turning must-own goods such as cars into on-demand services.
Trading companies such as Mitsui & Co. and Mitsubishi Corp., once rivals of Noble, are trying to expand into more value-added areas -- everything from biotechnology to venture capital. But Noble's mercurial founder, Richard Elman, whose 18% stake was once worth more than $1.5 billion, never tried to take his company in such new directions. Nor did he use his fortune to buy Noble debt to reduce the leverage which now threatens his company's existence. (On Aug. 8, Elman's stake was worth a mere $87 million.)
Moreover, consolidation makes those who are left out even more vulnerable. For example, ships flying the Noble flag were once among the few -- along with those of Cosco, the Chinese state-owned shipping group, and Hong Kong carrier OOCL -- that had easy access to Chinese ports. Now the two Chinese companies have combined forces and have more economies of scale than Noble can dream of.
TRUST DEFICIT For Noble all these challenges are compounded by a loss of confidence that may prove fatal. "Cash burn remains the most pressing issue going forward in order to avoid a liquidity crunch and/or a default situation," Nomura Securities noted in late July.
Noble expects an adjusted net loss of $450 million to $500 million in its second quarter -- more than triple its comparable first quarter loss of $129 million. Much of the second quarter loss is accounted for by hard-to-value noncash mark-to-market losses in the hard commodities business. The value of Noble's gross derivative contracts amounted to some $3.4 billion at the end of March.
Noble's finances are sufficiently murky for few hedge funds to adopt purely bearish positions without hedging them. One of the more popular trades is to take a short position on the company's bonds and hold bank debt, which ranks higher in the capital structure and would likely be repaid from company assets in the event of a collapse. Much of Noble's bank debt (up to 40% of its revolving credit facility, according to Nomura analyst Annisa Lee in Hong Kong), no longer sits with the original lenders, which means that many holders have more to gain from a default than from granting the repayment concessions the company is expected to seek.
Noble denies allegations of improper accounting. But the company's plight is in some ways reminiscent of the demise of Enron, the U.S. oil trading group that imploded in 2001 amid allegations that it concealed the true state of its accounts, especially in relation to derivatives positions. The then-young credit default swap market began to reflect the views of those who doubted the veracity of the figures on hard-to-value positions, ratings agencies downgraded the debt, counterparties demanded more collateral and the company entered a death spiral as its share price dropped.
Noble's best hope is to try to find a company with a stronger balance sheet and lower cost of capital to come to its rescue. Sinochem Group, a Chinese chemical powerhouse, considered playing that role -- its head, Frank Ning, took a stake in Noble's agricultural unit in 2014 when he was running China National Cereals, Oils and Foodstuffs. But Ning backed off when discreet inquiries established that U.S. regulators would not approve such a transaction, according to several people familiar with the matter.
In mid-June, creditors gave Noble a four-month extension to repay a $2 billion credit line to shore up its position. With each passing day that looks more difficult.
When liquidity is ample, the market is apt to give over-leveraged companies the benefit of the doubt. But the prospect of a double tightening in monetary policy by the U.S. Federal Reserve and the People's Bank of China is making creditors cautious. Three potential issuers canceled plans to issue high-yield bonds in Asia in late July when they realized they would have to pay higher coupons than they had anticipated.
Noble is likely to be a casualty of this gloomy shift in sentiment. But it is unlikely to be the only one.
Henny Sender is the Financial Times' chief correspondent for international finance, based in Hong Kong, and a regular contributor to the Nikkei Asian Review. She has extensive experience of covering international finance.