Explaining Noble Group's Controversial Survival Plan: QuickTake

(Bloomberg) -- Once Asia’s biggest commodities trader, Noble Group Ltd. is struggling to survive. The Hong Kong-based company is about to default on its debt repayments but is betting on a restructuring plan to stay alive. It’s a complicated -- and controversial -- process that would leave some bond investors with next to nothing. And it comes at a time when Singapore-listed Noble is hemorrhaging cash, meaning success for the restructuring plan would be far from the last of the trader’s challenges.

1. What went wrong at Noble?

In a classic rags-to-riches tale, British high school dropout Richard Elman built Noble into a commodities force based on his conviction that demand would explode in China and India. Elman, now 77, wanted to create a global behemoth and in 2009-2010 embarked on a $2 billion spending spree. But the debt burden ballooned and began to look less tenable as commodity prices softened, Chinese growth slowed and profitability waned. The tipping point was the publication in February 2015 by an unknown analyst group called Iceberg Research of scathing critiques of Noble’s accounting. Investors took fright and short sellers including Muddy Waters LLP took aim.

2. Were Iceberg’s allegations right?

Noble dismissed Iceberg as the work of a disgruntled former employee and sued, only to months later write down $1.2 billion mostly from long-term coal contracts it had booked at an excessive price. Noble’s stock slumped 65 percent in 2015, 44 percent in 2016 and 88 percent in 2017. Needing to shore up its balance sheet, Noble sold assets including its global oil and gas business, leaving a once worldwide operation boasting 15,000 employees with little to show beyond its Asian trading operations and a Jamaican alumina plant.

3. Why the need for the restructuring plan?

With more than $1 billion due in the first half of 2017, Noble had little choice but to enter negotiations with its creditors. In January, under an agreement with a so-called ad hoc group of investors, it announced a restructuring plan that would halve its debt and hand its senior creditors 70 percent of the equity in a restructured company. Noble revised the proposal in March, marginally sweetening terms for its current shareholders from the original proposal. The restructuring isn’t a bankruptcy process but a so-called scheme of arrangement -- a court-led statutory procedure that frees Noble and its management from any claims by bondholders.

4. Who’s backing the plan?

The ad hoc group -- including hedge funds such as Varde Partners, Och-Ziff Capital Management and Taconic Capital Advisors -- has driven negotiations. The group, which represents about 46 percent of Noble’s existing senior debt instruments (the three main bonds and revolving credit facilities), signed a binding restructuring support agreement in March. Deutsche Bank AG has also signed up to the plan, while ING Bank NV is in the process of acceding to it. Together those two lenders own 4 percent of the senior claims. The ad hoc group is in talks with another batch of creditors holding about 15 percent, who have indicated their broad support. Approval is required from a majority in number of creditors present at the meeting to vote on the scheme of arrangement, and they must have at least 75 percent of the value of holdings of all creditors present.

5. So if there’s an agreement, what’s the issue?

As well as the main bondholders, there are also owners of $400 million of perpetual bonds (notes with no maturity date) to consider. Following pushback from perp holders, Noble revised its term, offering them as much as $25 million in new perpetual bonds, compared with $15 million cash offered in January’s plan. Perpetual holders will be given the opportunity to exchange their existing perpetuals for new ones, while ones unhappy with the offer may take their grievances to the courts. A revolt by Noble’s shareholders has also emerged as a major threat.

6. What will Noble do if investors block the deal?

Noble told disgruntled investors it would file for administration in the U.K. if they block the revised restructuring plan. If investors don’t approve the new terms, Noble said it will complete the restructuring by selling its assets to a new company in the U.K. The threat of administration could increase tension between the company’s management and some of its shareholders and creditors.

How a Bond Default Could Mess With Noble Group’s Restructuring

7. What are the next steps for Noble?

Noble is racing to get the restructuring plan approved. It has said it won’t make payment on $379 million of bonds due on March 20 to preserve assets “for the benefit of all stakeholders during the implementation of the proposed restructuring.” Noble already missed paying interest due March 9 on bonds that expire in 2022 and faces a $1.1 billion loan repayment due May 18. It’s crucial the restructuring’s done “expediently,” says BNP Paribas SA. Here’s a timeline for Noble’s next steps:

Timeline

8. How is the business faring?

Fresh writedowns of about $1.5 billion made for an annual loss of $4.9 billion in 2017 and left the company with negative net assets of about $800 million, prompting its auditor to conclude there was material uncertainty that could cast “significant doubt” over the commodity trader’s ability to continue operating. Noble also has warned that further writedowns may be in store.

The Reference Shelf

• Noble Group’s carcass is being stripped of its meat, says Bloomberg Gadfly’s David Fickling.
• Iceberg Research was right.
• Elman’s rags-to-riches tales ends in disaster.
• The restructuring support agreement.
• Noble’s acquisitions and disposals.

--With assistance from Jasmine Ng and Jack Farchy

To contact the reporter on this story: Denise Wee in Hong Kong at dwee10@bloomberg.net.

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Grant Clark

©2018 Bloomberg L.P.