Downgrading of Noble Group To Junk Status

Noble Group's downgrading to junk status on 29Dec 15 by Moody's (on its unsecured bonds) has just been dealt another blow by another credit rating agency, Standard & Poor's, which also downgraded it to junk status on 7 Jan 2016. The writing was already on the wall sometime last year, especially during the middle of the year when there were several desperate attempts by Noble's management to repair its image across the board. All the comments done by Iceberg Research seem to have come almost a full circle now as more statistics come to light, especially their comment on the over inflation of the value of their assets which may have, in part, been proven to be the truth as events unfold in Noble's recent disposal of its holdings in Noble Agri.

According to Iceberg Research, Noble Group's CEO Mr Alireza, claimed in November 2015 that they were committed to holding their remaining stake of 49 % after selling off 51 % interest to COFCO for $1.46b. However, a month later their stand changed and that commitment evaporated when it was indicated they would be disposing off the remaining 49 % stake. It was, according to Iceberg, desperate times calling for desperate action. The crux of the issue was the selling price which was indicated as around $700m+, half that for which the earlier 51 % shares was sold at. Iceberg Research's analysis is that after COFCO had taken controlling shareholding in Noble Agri they became privy to financial records of the subsidiary and have come to realize that the earlier 51% shares were never worth that $1.46b that Noble Group had valued it to be. The second tranche, therefore, was more or less adjusted by the difference in the excess value that COFCO had paid for in the earlier acquisition. In other words, Noble Agri never had the value of $2.94b that was implied with the value of $1.46b sale price of the earlier 51 %. With the later batch 49 % sale price, Noble Agri was only valued at $2.2b at most, and that figure included the unknown amount of subsidies which Noble Group is still liable to pay to Noble Agri ( which, after subtraction of this unknown amount of subsidies, would make the valuation of the subsidiary even lower). All this constitute enough "evidence" and substantiates Iceberg Research's contention that Noble Group had been inflating the value of their assets all along. Since the carrying value of the remaining 49 % in Noble Group's books is around $1.25b and they would be receiving around $700m+ for its disposal, the group would be facing a loss of around $550m in Q4.

Today, Noble Group shares have dropped to around 0.32 and could get worse if market sentiments do not pick up.

Hi Aquarius, what do you make of this buying?

0154 GMT [Dow Jones] The chairman and founder of commodities trader Noble Group (N21.SG) is putting his money where is mouth is. Richard Elman upped his stake in the embattled firm and with the purchase of another 10 million shares for a total consideration of just under S$3.2 million, the company said in a statement early Monday morning to the Singapore Exchange. Elman appears to be taking advantage of Noble's depressed share price, which on Monday falls to its lowest since October 2008 and not far off its lowest since 2004. The company's shares are under pressure again, following ratings downgrade by Moody's Investors Service and Standard & Poor's. Elman has bought shares several times before in recent months. Although Monday's buy was large in size, Elman's stake is raised just marginally to 22.13% from 21.98% previously.

@Rich
The Chairman (founder) of the group is digging his heels and embarking on a buying spree for 2 reasons : (a) the recent purchase which he made as mentioned by you was done to average out his cost for the earlier batches that he had bought at much higher prices. (b) he is trying to stamp the downward spiral of the share price by showing "management" support for the counter (something which he had been doing the past few months whenever the price dipped significantly without rebounding back). But is it going to help? I don't think so. The more well informed investors would view the "management" with a little reservation given the fact that the group's CEO, Mr Alireza, who is the one actually running the show, is himself not the one mopping up the shares; not forgetting that he was recruited from Goldman Sachs, Asia Pacific, whose professional conduct and integrity had taken a hit with its involvement in over-valuation and placement of 1MDB bonds for which it earned a ridiculously high fee. As it turned out, the same thing is happening here in Noble Group with its assets being highly over-valued (according to Iceberg Research) and at a time when an ex-management staff of Goldman Sachs is its sitting CEO. The subject of Goldman Sachs' involvement in 1MDB is presently under investigations by the US authorities.

Despite Mr Alireza's claim that the group would not be materially affected by the downgrading of its credit rating to junk status by the 2 mentioned credit rating agencies, potential investors who are looking for a good time to buy the stock should bear in mind the following factors :
(a) The value of the group's bonds has declined and are currently traded way below their book price, thus inversely increasing its returns on investment value (at last count a couple of days ago at a high of more than 26 %). Though it may offer a potential of high return on maturity, the possibility of default may arise because the group is experiencing potential liquidity problems.
(b) Because of the junk bond rating, a lot of fund managers are precluded from buying them or even in buying up the motherboard shares because their constitution does not permit them to invest in companies that are rated in the junk category, which means the army of potential buyers may shrink, or at least, specific groups of potential investors with long staying power are prevented from helping any current rescue mission.
(c) Companies which are showing yearly growth in sales almost always also show growth in their accounts receivables. This is a given. However, it is a different thing when a company's sales are not showing any real growth but its accounts receivables are growing at a very much faster pace every year. It is hoisting a red flag. What this means is that the company has a longer debt collection period, implying that its debtors are having difficulty paying off their liabilities to the group as and when they fall due. Noble group is showing this characteristic - its revenue is not showing any significant growth but its accounts receivables are increasing steadily. There is, therefore, no net cash inflow into the system. To some, it may be quite mind bloggling to hear the CEO saying that they do not have any potential liquidity problem. If that is the case, there is no need to sell off their subsidiary Noble Agri. It is very clear that the sale was done to raise cash to pay off some of the bonds that will be maturing in a few months' time.
(d) The group does not have a debt retirement scheme, and all borrowings are done on a roll over basis, i.e. in layman term it is like getting money from Peter to pay Paul when the debt is due. So when its operations increase, its debt liability also increases accordingly. It is like building up an air bubble. The minute it cannot raise any more financing from the capital market through bond issue or other securities, or through placement of new shares, it will not be able to pay off Peter or Paul or the hoardes of others waiting to redeem their bonds because it is not generating sufficient net cash from its operations. And this would be compounded by the weak sentiments in the industries it is engaged in as most of its clients and debtors would be scaling down in order to stay afloat. Bad debts are no longer a potential but a reality. This is the situation the group and the industry is facing currently.