Noble Group Says Debt ‘Nowhere Near’ Muddy Waters Estimates

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Noble Group Ltd., the commodity trader whose accounting practices have been criticized by several researchers, said it “categorically” rejects claims by Muddy Waters LLC that it has unsustainable debt levels.

In response to Thursday’s report by Muddy Waters, which is now shorting Noble’s stock, the Hong Kong-based firm said its balance sheet is the strongest ever and that more than half its debt is not due for at least two years. Noble made the comments in a statement to the Singapore Stock Exchange today.

Muddy Waters, which was founded by short seller Carson Block, follows a critique of Noble’s finances and accounts by an anonymous group that calls itself Iceberg Research and by Hong Kong-based GMT Research. Iceberg issued the first report on Feb. 15.

“Muddy Waters has had a better experience in writing such reports so it adds more weight, because it’s a company with a record of getting things right,” said Ben Surtees, a London-based fund management director at Jupiter Asset Management Ltd. “But they don’t always get it right.”

Noble’s shares gained 3.5 percent to 89 Singapore cents at the close. They fell 5.5 percent Thursday, which was the most in a month.

On 11 previous occasions when Muddy Waters has released a report on a company, the shares in the companies have fallen an average 20 percent in the trading session that followed.

Noble’s Rebuttal

Noble’s rebuttal included its rejection of the notion put forward by Muddy Waters that the Asian trading company exists only to borrow and burn cash. The trader noted a jump in sales as a growth factor and explained negative cash flows by shifts in strategy.

While acknowledging that Noble’s debt levels fluctuate between its quarterly reporting dates as “more a reflection of market practice,” the company said the changes are “nowhere near” as extreme as Muddy Waters portrayed in its report.

Noble also rejected what it called Muddy Waters’ “unfounded allegations” that it misled investors or manipulated its accounting in the case of the acquisition and disposal of Indonesian mining firm PT Alhasanie.

“The acquisition and disposal proceeds of PT ALH and the accounting of them are fully explainable through arms lengths commercial arrangements and third party independent valuations,” Noble said.

Twitter Response

In a Twitter response, Muddy Waters said it will respond to Noble’s statement.

“We can already tell it will be fun,” the group said.

Noble Group’s 6.75 percent notes maturing in January 2020 rose 0.45 cents to 102.67 cents on the dollar as of 12:18 p.m. on Friday in Hong Kong, according to Bloomberg-compiled prices. The yield fell 11 basis points to 6.095 percent, paring a 67-basis point surge after the Muddy Waters’s report on Thursday.

CreditSights Inc., an independent credit research firm, said it prefers U.S. high-yield notes from DCP Midstream LLC yielding 6 percent, saying it wasn’t comfortable with the risk-reward on Noble Group’s securities.

For Jupiter Asset’s Surtees, “the big elephant in the room” for Noble is how the commodity company accounts for fair value gains in their profit statement, an issue Iceberg focused on in its reports.

“In terms of how they account fair value gains, I would urge the management to do a better job,” said Surtees, whose company oversees 32 billion pounds ($47 billion) in assets, including Noble shares.

There are signs that Noble executives are already “doing a better job” and will probably improve in the future, he said.

Short selling is the sale of stock borrowed from shareholders on speculation that the price will fall, allowing repurchase of the shares at a lower price for return to the holder and the pocketing of the difference.

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