Noble Group Warns Survival Hangs on Deal After Immense Loss

(Bloomberg) -- Noble Group Ltd. said a controversial debt restructuring was the only hope for survival after a $4.94 billion loss triggered a warning from its auditor that the commodity trader may not be able to continue operating.

Chairman Paul Brough said he had "no magic pill" for investors facing hefty losses under a planned restructuring that would halve Noble’s $3.5 billion debt. He warned that no deal with a strategic investor was likely before the restructuring is completed, and that the alternative to the deal was a court-driven insolvency process that would be "very damaging indeed".

"What we’re focused on is trying to get all of the parties over the line," Brough said on a call. "I do accept that it requires an allocation of some pain and discomfort, but I’m afraid that there’s no magic pill to solve it."

The company that was once Asia’s largest commodity trader has been brought to the brink of collapse after a three-year crisis marked by losses and writedowns. In annual results on Wednesday, its auditor Ernst & Young LLP pointed to the trader’s massive loss, bank debt and negative net assets as indicating the “existence of material uncertainty which may cast significant doubt over the group’s ability to continue as a going concern.”

A preliminary deal struck by the company and a group of large hedge fund creditors last month has encountered resistance from some bondholders and shareholders. In a fresh blow just hours before the earnings, a group of perpetual bondholders said they’d fight the plan.

The deal, which Noble says would allow it to continue operating, would hand the lion’s share of the company’s remaining value to creditors willing to participate in a new trade finance facility. That’ll include hedge funds from the so-called ad hoc group that’s underwriting the facility. What’s more, Noble’s management will receive an equity stake of as much as 20 percent.

For a Quicktake on Noble’s restructuring plan, click here

“It’s wholly unclear to me why unsecured creditors are giving this team the chance to vaporize their capital all over again,” said Alex Turnbull, Singapore-based managing partner at Keshik Capital Pte. "How bad could this business be with new management? The current team could catch fire in a swimming pool."

Noble is still racing to agree the final terms of the deal with the ad-hoc group, something Brough said he hoped to achieve in the next few days or weeks.

“Time is of the essence, we appreciate that,” Brough said. Noble’s advisers have described the deal as "probably the most complex restructuring ever undertaken in Asia", he added.

Bond Coupons

He declined to say whether Noble would pay a coupon on its 2022 bond or repay its 2018 bond, both of which are due in March. Noble paid a coupon on its 2020 bond last month "in order to maintain our franchise", Brough said.

Noble executives and their rivals at other traders expect that some key counterparties could walk away from long-term contracts with the company in the event of a restructuring or default, putting further strain on the business, Bloomberg reported in November.

Noble’s downfall was triggered in February 2015 when an unknown analyst group called Iceberg Research published scathing critiques of the company’s accounting, warning some earnings wouldn’t materialize and the trader would be short on cash to settle debts.

While Noble has consistently dismissed the criticism, much of what Iceberg flagged has since come to pass and the company’s market value has collapsed amid asset sales, downgrades and vast losses. The trader is now worth about $159 million compared with more than $10 billion in 2010. On Thursday, the shares fell as much as 8.1 percent, dropping for a sixth day.

Annual Loss

The full-year loss included $1.05 billion from operations the company has sold as it shrinks to survive, as well as $3.2 billion in exceptional items from businesses that remain, according to the statement. Cash and equivalents fell to $492 million at end-December, from $1.2 billion a year earlier.

Under the restructuring plan, which is backed by some senior creditors, about half of the Hong Kong-based company’s $3.5 billion debt will be switched into new equity, while perpetual bondholders are being offered just a few cents on the dollar. All existing shareholders will get a 10 percent holding, and management could own as much as 20 percent.

The group of perpetual bondholders resisting the push have hired Latham & Watkins LLP to negotiate a better deal, according to a statement earlier on Wednesday. Separately, one of the top shareholders, Goldilocks Investment Co., has complained of massive dilution, called the losses “extremely shocking”, and is appealing for other investors to fight.

--With assistance from Lianting Tu David Yong James Poole and Jake Lloyd-Smith

To contact the reporters on this story: Jack Farchy in London at jfarchy@bloomberg.net, Jasmine Ng in Singapore at jng299@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Alexander Kwiatkowski, Jake Lloyd-Smith

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