BORROWED TIME

Noble’s Path From Greatness

The commodities trader is still on borrowed time.
From
Photographer: Daniel Acker/Bloomberg

Noble Group Ltd. has received a 120-day stay of execution.

As Gadfly predicted a month ago, lenders flinched before pulling the trigger, and have now extended one of the company's main revolving-credit facilities until October. Unless something changes fast, though, the commodity trader is still living on borrowed time.

A business in Noble's predicament resembles a three-legged stool, propped up or made unstable by three streams of cash. Its core problem has been an inability to generate consistent positive operating cashflows. Unless it gets lucky over the next four months, the company can't expect much help on that front.

Financing is the next leg, but that also looks wobbly. Lenders that are confident in their borrowers don't measure out their credit 120 days at a time, or cut the size of the overall facilities on offer. At least one investor has applied to the International Swaps & Derivatives Association to rule whether the extension counts as a restructuring and allows payouts on credit-default swaps. That process doesn't necessarily directly affect Noble, but it's not a good look.

The last leg is investment -- or in this case, disinvestment. Talks are continuing on selling a stake in the group or its subsidiaries, or parts of the business, Noble said in a regulatory statement Tuesday. That sort of garage sale is a specialty of incoming Chairman Paul Brough, who helped liquidate Lehman Brothers' assets in Asia.

Brough's problem is that Noble's cupboard is looking rather bare. Take out intangibles and the short-term assets that should more or less net off against current liabilities, and Noble's holdings of tangible long-term assets at the end of last year were the lowest they've been since 2008. 1

On the face of it, that beggars belief. Noble's $39.67 billion of energy-trading revenue last year was enough to make it one of the biggest players in the energy market. It has major industrial assets on five continents, a fleet of ships valued at $270 million at the end of December, and stakes in more than a dozen joint ventures and associated companies, not to mention the $1.55 billion of cash on the balance sheet at the end of March.

The problem is that many of those assets shrink on closer inspection. All but $2.7 million of that $270 million shipping fleet was pledged against loans, for instance. Noble's shares in the seven listed companies in which it holds stakes -- the equity that will be easiest to turn quickly into cash -- are worth $67 million, according to Gadfly calculations. About $359 million of the $1.55 billion cash holdings is held with futures brokers, so it can't easily be deployed.

The real issue, though, is existential: What, at bottom, is a commodities trader? While Noble spent years building itself into the sort of industrial powerhouse epitomized by the likes of Glencore Plc and, increasingly, Trafigura Beheer BV, its debt woes have seen it contract back to its pure trading origins.

The vital assets of that sort of business aren't mines and storage terminals and fuel-blending facilities. They're instant-messaging accounts, contact books, and employees with a deep knowledge of their customers and markets.

Rival businesses don't need M&A to get their hands on that sort of property. Especially for traders who fear the longevity of their current employer, a generous signing bonus and compensation package should be plenty for any company wanting to take over Noble's core business.

Philipp Brothers, the legendary commodities-trading giant that made the careers of Noble's founder Richard Elman and his Glencore peer Marc Rich, 2  declined to almost nothing over the past two decades before entering retirement as a boutique trading house run by a former Morgan Stanley co-head of commodities.

For all Noble's $12 billion of assets and $47 billion of revenue, that path from greatness looks more plausible.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The figure at the end of March was modestly better at $2.06 billion, but the past three quarters have still seen the lowest figures on the measure since the first quarter of 2009.

  2. The 1981 merger with Salomon Brothers also provided crucial funds used in the start-up of Bloomberg LP, publisher of Gadfly.

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