Crashing Noble Group rips a hole in Australia Inc.

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This is darkly amusing:

Over the past 18 months, Noble Group has tried to get itself out of a deep hole by raising almost $3bn through asset sales and bond and share issues. But for what was once Asia’s largest commodities trader, this fundraising effort might not be enough.

Noble’s shares have dropped sharply after the company revealed this month that problems with contracts to buy and sell coal had left it nursing a $129m net loss in the first quarter of 2017. The prices of its bonds have meanwhile declined to levels that suggest traders see a high risk of default. This is just the latest setback for Noble and its founder and largest shareholder Richard Elman, who warned at the results that the company may not be profitable until 2019.

Noble has been battered since 2015, as the then downturn in commodities markets coincided with questions about the company’s accounting. Its shares have plunged more than 90 per cent since analysts led by a little-known research firm called Iceberg started highlighting how Noble’s profits on long-term contracts to source and supply commodities were not fully matched by cash flow, and this in turn focused attention on whether it could service its large debt load.

More than two-thirds of the $3bn raised by Noble has been used to repay loans during 2016 and 2017. But the company still had $3.2bn of net debt at March 31.

Unless Noble can bring about a successful conclusion to its lengthy search for a major new shareholder, the company has its work cut out to convince investors and creditors that it has a future. “It’s too soon to say the banks have given up on Noble but if things don’t improve in the next few months it will get a lot more difficult,” says Mervin Song, analyst at DBS.

And today, S&P downgraded it again:

We believe Noble’s liquidity is weak and that the company’s refinancing risk has increased following the company’s unexpected loss in the first quarter of 2017. It added: The negative rating outlook reflects the potential that Noble’s cash flow and profitability will remain weak for the next 12 months, with the risk of nonpayment of its debt obligations due to weakened access to funding.

And the result:

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The flaw in Nobel Group’s business model is a pointed reminder of what’s at stake when market sentiment reaches a tipping point against what is basically a classic borrow short, lend long business model:

…long-term contracts to source and supply commodities were not fully matched by cash flow, and this in turn focused attention on whether it could service its large debt load.

Australia Inc has the same business model, leveraging volatile commodity income into long term borrowing for house price inflation and selling off assets like crazy to fund the bad habit. It is poignant that S&P has downgraded both within 24 hours.

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It is always perilous to compare the fate of a firm with a nation. Solvency questions are different given the latter has the power to tax and, indeed, print money out of thin air. One does not go bankrupt as a nation in the same way that does a business.

But the difference is one of degree rather than kind. The business ceases to exist as it is broken up and sold off as parts, living on as a component of something larger and more solvent. The nation may not cease to exist but it likewise faces some very hard choices about what assets it sells and to whom as it spends time in the sovereign equivalent of chapter 11 bankruptcy. Like, for instance, who ends up owning the nation’s banks (and, therefore, it).

The obvious advantage that the nation has over the firm is that it can also force external creditors to take losses, usually by devaluing the currency in which they are being paid. But for the folks who are living under that currency, who are effectively the shareholders in Noble Group, the loss of value can still be catastrophic as the currency falls a long, long way.

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That’s why the forthcoming MB Fund (launching in under 30 days) is allocated to 70% international equities.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.