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The intrigue around the proposed rescue package for Noble Group reveals appetite for commodities trading is a strong as ever

The intrigue around the proposed rescue package for Noble Group reveals appetite for commodities trading is a strong as ever
Commodities markets may shift further eastwards as the century continues

The fate of one of the world’s most prominent commodity trading companies, Noble Group, will be decided on Monday, after months of uncertainty following a major debt default in March.

A restructuring deal is on the table to roll over US$3.5bn of loan notes, and in the process transferring majority ownership of the company to creditors.

Founder Richard Elman will step down from the board once the deal goes through, in a reversal of his previously announced intention to stay on.

Noble’s rise and fall has been nothing short of remarkable.

At one point, when Elman was at the peak of his powers, trading out of Hong Kong at the height of the mining boom in the first decade of the current century, commentators dubbed him the last of the great European “Taipans” in Asia.

Now though, a company that was at one stage worth more than US$11bn is now worth little more than US$100mln, and is hampered by a debt burden it cannot service.

The story has many twists and turns, not least involving the input of an anonymous blogger who for several years claimed to be exposing serious inconsistencies in the way Noble was applying risk controls and valuing long-term contracts.

The blogger, who has since been revealed as a former credit analyst inside Noble, reckoned that long-term contracts were overvalued by around US$3.8bn.

Lawsuits are flying around, but of course the obvious point is that the valuation of these contracts on Noble’s balance sheet would have offset the outstanding debt nicely if they had stood up.

The default in March tells its own story.

But it’s not over yet. If the restructuring is passed on 27 August Noble will survive as one of Asia’s pre-eminent trading groups which, in the light of the shifting patterns of global trade, is not a bad position to be in.

That pole position is one reason why creditors may well be amenable to a deal. Outstanding debt has been trading at between 44% and 46% of face value, so there is still a market out there, even if the question marks remain.

But further encouragement for those backing a deal has lately come in from Deutsche Bank, a significant creditor of Noble in its own right, which is now offering to purchase outstanding debt directly from holders at 45% of face value.

It’s not clear if Deutsche is offering to trade on its own book or on behalf of a client, but either way, it sends a clear signal that the bank expects the restructuring to go through. Not only that, but it, or its client, wants as big a part of the action as it can get.

The thinking is that any existing creditor unable to provide fresh financing to Noble as part of the debt-for equity deal will seize on the Deutsche offer to exit on terms that, while not exactly favourable, do at least prevent a total write-down.

Deutsche itself has already committed to providing an extra US$600mln in finance to Noble, alongside a US$100mln hedging facility.

So the thinking at the current stage is that Noble will survive, supported by its creditors, and attempt to put an extremely difficult period behind it.

That major lenders like Deutsche and ING are backing the deal goes a long way towards indicating what these major European financial institutions think about the future of the global economy and commodities trading in particular.

Noble’s troubles have been ongoing for some time, but if it had really hit the buffers either right in the aftermath of the 2008 global meltdown, or else when the commodities and mining hit their nadir in early 2015, it might not have survived at all.

After all, even the golden boys at Glencore (LON:GLEN) were struggling back in those days amidst a commodities downturn and doubts about its balance sheet.

If Noble was going to pick a moment to fail, this was surely it. It will be interesting to see what happens on Monday.

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