We rang the alarm bell when on Sunday night, one of our "favorite" companies and Asia's largest, junk-rated commodity trader, Noble Group, unexpectedly announced two jarring developments: the removal of its long-term, ex-Goldman CEO, Yusuf Alireza, as well as the sale of its top performing asset, Noble Americas Energy Solutions. The company said that as a result of the sale it will generate "significant cash proceeds", which as we then said "is great since Nobel is desperately in need of cash; it also means that the company is losing one more of its star performing assets as it continues to asset strip itself of any potential future growth, and is merely scrambling to preserve solvency and liquidity."
It appears the cash proceeds raised just 4 days ago were not nearly enough!
Moments ago, this scramble for liquidity hit another unprecedented low, when Noble announced that days after its CEO stepped down, Noble's Chairman Richard Elman would also be leaving, at the same time as the company unveiled it would issue a massive $500 million rights offering at a whopping 63% discount to the market price, in a move which confirms just how little equity value insolvent, cash bleeding commodity companies really have when push comes to shove and they have to pay down at all costs. It also begs the question why the company did not boost its $3 billion credit facility unveiled just three weeks ago by a token $500 million, which would have been available at a far lower cost of capital.
There are two possible answers: either something went drastically wrong in just the past three weeks and a major need of cash emerged, or Noble is now so devoid of unencumbered assets that it can't pledge anything to the banks from this point onward, and will be forced to dilute itself to death by a thousand cuts, until the company finally files for bankruptcy as we have been warning is the ultimately endgame since last summer.
As for the rights offering, Bloomberg has the details: The Hong Kong-based company will offer 1 rights share for each existing share at 11 Singapore cents, a 63 percent discount from the close on Thursday, according to a statement on Friday. Of the total 6.54 billion shares to be issued, biggest holder Elman has agreed to take 625.5 million, while China Investment Corp., the third-largest, agreed to take 630.6 million. CIC will get a second seat on the board.
This means that when the stock reopens for trading, its value, already at all time lows (our TERP math is a little rusty) will drop to an even more distressed, and far lower price.
Which reminds us that we have been warning about this endgame since last summer, as first noted in "Noble Group’s Kurtosis Awakening Moment For The Commodity Markets." The commodity market just had another jarring wake up call.
For those who have missed the recent dramatic change in the company's fortune (for the worse), here is a quick reminder: "Noble Group has endured another turbulent week after announcing the departure of CEO Yusuf Alireza on Monday and saying it planned to sell off a business, Noble Americas Energy Solutions, that less than a month ago he described as a core asset. The trader is seeking a turnaround after its shares collapsed amid the commodity rout and it faced allegations of improper accounting. China is the largest user of metals and energy, key commodities that Noble Group trades and supplies to mainland customers."
“Noble is still a major player in terms of global commodities and it makes sense strategically for Chinese interests to take a greater interest, given how much of a key player China is in global commodity markets,” said Tim Schroeders, a Melbourne-based portfolio manager at Pengana Capital Ltd., who helps oversee about $1.2 billion.
Even better since there is nobody quite as skilled as China when it comes to throwing good money after bad.
As for the Chairman, at Elman’s request, the board will set up a sub-committee to examine options for his succession, and will identify a replacement to assume the role of non-executive chairman. Elman wishes to step down as executive chairman within the next 12 months, it said. The search will be led by David Eldon, a non-executive director.
The obligatory spin: “The rights issue, together with the sale of Noble Americas Energy Solutions announced last Monday and the previously announced sale of low-return assets and working-capital reduction measures will, in aggregate, generate $2 billion in additional liquidity over the next 12 months,” the company said. “This liquidity will be available to further reduce net debt, and will also significantly improve the group’s financial flexibility.”
In other words, it cost the company its CEO, its Chairman and its most valuable asset, not to mention a massive dilution to existing stakeholders, to buy about year's worth of operations and debt servicing.
The new shares that aren’t underwritten either by Elman or CIC are being underwritten by a group of banks comprising HSBC Plc, Morgan Stanley, DBS Group Holdings Ltd., Societe Generale SA and ING Groep.
According to data compiled by Bloomberg, Noble Group’s other major shareholders are Prudential Plc, with 9.9 percent; Orbis Group, which has a 9.6 percent holding; and Franklin Resources Inc., with 5.9 percent. They won't be very happy after the company just took a chainsaw to their holdings.
As noted above, the company obtained a fresh financing totaling $3 billion less than a month ago, while acknowledging some banks had cut credit facilities during the first quarter. It had net debt of $1.9 billion maturing over the next 12 months, Alireza said May 12.
“It is clear from the decisive capital-raising actions that we have initiated post-refinancing that we have moved firmly to re-position our balance sheet."
Actually, no: the only thing you have succeeded in doing is admit that it was unable to obtain a secure line of credit for all the funds it desperately needed, forcing the cash-burning company into a blue light special liquidation. And if this: Asia's largest commodity trader, had to give a 63% discount to investors to put more money into it, thereby it also succeeded in giving the world a glimpse of just how massively overvalued commodity-related companies are as a result of the recent historic short squeeze. Luckily, even record squeezes eventually end. For what happens next look no further than Noble.