Dear Noble Group’s Creditors,

It is fair to say that your investment journey with Noble Group has been a tumultuous one. You probably feel nauseous after the months spent on this ship. Noble was a very large and diversified commodity trader with revenue of $86b. It was rated investment grade by three credit agencies. Now, you own the debt of an agonising group rated CCC-/Caa3. The 2018/2010 bonds fell to 46.8/40.8 cents on the dollar. The perpetual bonds lost almost all of their value. Equity holders have been almost wiped out and you are probably worried you will meet the same fate.

Your hard-earned money did not go up in smoke because the industry in which Noble operates is suffering. Look at Vitol, Trafigura, Mercuria, and Glencore: they are all busy counting the millions they make every day. You suffered losses because a small group of people inside Noble and its auditor, EY, intentionally misrepresented the balance sheet and the performance of this company. For instance, an associate, Yancoal, was overvalued by $480m or 48 times. A few weeks ago, Noble finally capitulated, recognising the impairment. Billions of commodities contracts fair values were created out of thin air. We now know that these contracts were worth nothing. Dozens of other assets were vastly overstated. Etc.

You lost a fortune but a few people have thrived. For example the current CEO Will Randall, the former CEO Yusuf Alireza and a few others made dozens of millions. They are now excessively rich. We don’t know exactly how much because Noble still refuses to disclose their individual remunerations. When asked to justify this policy, Noble claims the disclosure would “hurt its standing”. “Its what?”, you may ask. Its standing… They have a standing at Noble. This is the corporate version of the middle finger and it is pointed at you and at the shareholders who lost everything.

In the past five years, EY, the auditor that helped Noble to deceive you has been paid a total of $35m. That’s a lot of money when you think about it. Every year they substantially increase their fees. The credit agency Fitch was paid to assign a rating to the new bond issuance in March. Their very friendly rating of BB+ (stable outlook) was just below investment grade, and four notches higher than the rating assigned by Moody’s. The arguments of Fitch at that time were so absurd that there was a distinct smell of commercial influence. But Fitch pocketed its fee so the agency won’t complain.

The SGX, the “supposed-to-be-regulator” of the Singapore stock exchange, financially benefited from the large trading volumes of Noble’s stock. Many people did well.

The money Noble’s management and its auditor earned has not been generated by Noble’s operations. The company has burned $1.9b in three years. This money comes from… you and from the shareholders who subscribed the $500m equity raising in 2016. You have been financing the luxurious lifestyle of the few people who worked together to deceive you.

In other words, you have been royally screwed.

Nobody likes to experience that but this is really what happened. The objective of this open letter is to warn you that you are about to get duped once again by the very same persons who duped you the first time. We insist on the “very same persons” because it is the crucial issue here, and we will try to explain why. To them, you are a cow and they are coming to milk you again.

Noble has been battling liquidity issues for months. The alternative now is restructuring or liquidation. Noble has come to you with a seemingly interesting restructuring proposal. The company offers no haircut on the face value. The maturity of the bonds would be extended by two to three years. With some patience, you may recover 100% of your capital. On the other hand, the proposed mandatory convertible bond would delay a dilution of the shareholders. Importantly, this allows founder Richard Elman to retain its ownership percentage, and his influence.

So basically we take the same company without the good assets that have been sold, the same expensive management team that brought Noble to its knees, the same insufficient access to bank lines, and the same commodity industry that sees Noble as a close-to-death counterparty. But this time, instead of burning cash almost every quarter at an incredible speed as it has done for a while now, Noble is supposed to generate lots of cash and ultimately reimburse you.

We fail to understand how a company led by incompetent management that has burnt $1.9b in 3 years, recorded trading losses due to bad risk management, and paid itself sky-high salaries, etc. would be able to turn this business around.

What remains now is mainly the Hard commodities business (e.g. coal). This department headed by Will Randall is Noble’s dream factory: it is where most of the fictitious fair values were created. Noble wants analysts to believe that the Hards business is a strong cash generator. The CFO gave the number of $250m to $300m per year in the latest conference call. An analyst had the good idea of asking what this number was exactly. The CFO first answered that this was “operating cash flow revenue”. No idea what this means…. Then he clarified: this is the money Noble makes after buying and selling cargoes. Oh… all right so this is what Noble calls “operating income from supply chains”, which means this number is before SAO expenses, and finance costs. SAO of continuing operations were $228m for the first nine months of 2017 and finance costs were $156m. With these numbers, it is clear Noble will be unable to generate a positive operating cash flow to repay your debt. Most likely Noble will continue to burn cash. We believe that Noble’s management knows that this plan will fail and that what they want is to keep their jobs and their salaries as long as possible. Noble has been sinking for a certain number of structural reasons none of which are addressed by this restructuring proposal. The same causes have the same consequences:

 1. Noble does not have the right traders. To make money you need good traders, and to make it in a consistent way you need good risk management. What Noble has are mostly financial engineering specialists, experts at mark-to market creation. The trading loss Noble made in Q1 once again demonstrated that they don’t manage their risk correctly. If these traders worked for Vitol, Trafigura, or Glencore, they would have been fired and replaced a long time ago by better traders. Don’t forget that the reason why Noble created these huge fair values was to hide trading losses and bad investment decisions. Trading losses are not a new problem at Noble.

2. Noble will continue to be strangled by the lack of financing/letters of credit lines. This company has been completely unable to operate normally for a few quarters already. Banks or counterparties will be reluctant to increase their exposure after a restructuring deal is signed because they don’t want to find themselves stuck, as some of you (the RCF banks) are now. To make things worse, DBS dropped Noble recently. Besides, Noble is paying prohibitive financing costs, which prevents the company from competing with its peers.

3. It is very likely future liabilities have been hidden on Noble’s balance sheet. We have repeatedly warned the market about this risk. The problem with this company is not only that assets have been wildly overvalued. Some liabilities have probably been drastically undervalued. It is the only way we can explain how bad Noble’s cash flow generation has been. This is a major risk for you. You cannot estimate this risk because the auditor (EY) will not tell you. Don’t believe that Noble’s balance sheet is clean after they recognised billions of impairments. The numbers are still completely unreliable.

4. Once again Noble is overly-optimistic on the valuation of the remaining assets that would back the newly issued bonds. Noble claims these assets including the stake in Jamalco or Harbour Energy are worth $1b. The company sold Agri, Energy Resources, the gas-and-power business, and the oil business. Every single time, the price they obtained was substantially lower than what they promised. Jamalco is plagued by high energy costs and there are no details on the stake in Harbour Energy that has been substantially diluted.

This restructuring will not address any of the fundamental weaknesses that led to Noble’s collapse.

Now, this is what will really happen. The company will continue to burn cash or generate minimum operating cash flow. Incompetent traders will continue to take the wrong bets and ignore basic risk management. Part of this cash burn will be caused by management’s salaries and bonuses that they will still refuse to disclose. Counterparties will continue to cut their exposure to Noble. The company will continue to fabricate its bottom line by signing dubious contracts that will never be realised. EY will be happy to sign off on the accounts. Then a few months later, Noble will turn to you and say: “Sorry the plan did not work because we don’t generate enough cash flow. We need a new plan.” Oh really?… The company will be in an even weaker position at that time but senior managers will be richer because of the huge salaries and bonuses they pay to themselves. Finally, one day, the head of a bank credit committee will shout at his relationship managers to tell them that this clown show has consumed enough time and money in his bank, and that liquidation should commence.

If Noble’s plan is not credible, does it mean that liquidation is the only option for you now? Not necessarily but it’s high time to address the fundamental reasons behind the collapse of this company. Everything boils down to the toxic culture made of incompetence, cynicism, and greed, and the few people who embody it.

Look around you. You are surrounded by the persons who are responsible for your financial ruin. Let’s take the example of Noble’s CEO Will Randall. As we suspected in our reports, most of the manipulations came from the Hard Commodities division run by him. The $1.1b impairment at the end of 2015? That’s the portfolio of Will Randall. The $130m trading loss in Q1 that accelerated Noble’s crisis? That’s Will Randall. The $1.2b impairment in Q2? That’s Will Randall. Yancoal overvalued 48 times on the balance sheet? That’s Will Randall.

Groups like Vitol, Glencore, and Mercuria would have replaced Mr Randall a long time ago. They don’t keep traders responsible for big losses, bad risk management; even less, traders who built billions of dollars in fictitious profit. Mr Randall has been described as the protégé of Richard Elman and owes him his successful career at Noble and financial wealth. Mr Elman is undoubtedly the man who ordered Noble’s financial manipulations and Mr Randall was his hand. We strongly believe that his loyalty to Mr Elman is the reason why he was appointed and continues to be the CEO.

Noble will continue to do everything it can to hide its trading losses. You should probably investigate the contracts that the Hard Commodities division recently signed with an obscure rare-earth exploration company in Malawi called Mkango Resources. The company is listed in Canada with a small market cap of Can$11m. Here is a Google picture of the lovely but unimpressive corporate address of Mkango’s head office in Canada.

Financing and signing offtake/marketing agreements with companies that don’t produce anything is typical of the way Noble has created fictitious profit for years.

The people you are talking to, have deceived you and will do it again without hesitation. More than ever, you need managers who will tell you the truth and this is not what you have in front of you. The current chairman Paul Brough is not an outsider who joined Noble recently and has never been involved in Noble’s shenanigans. He used to be an independent director at Noble. This former KPMG partner vigorously defended Noble’s accounting back in 2015 when he declared: “The (PWC) reports demonstrate clearly that the accusations of bad faith on Noble’s part in the preparation of its mark-to-market valuations have no basis”. He was lying that day and with his accounting background, he perfectly knew it. He misled investors and this lie contributed to their financial loss. This is the man who now leads restructuring discussions.

Another example: when Noble raised a $750m bond offering in March, the company did not disclose any information about the coal trading losses it recorded in Q1. When asked why Noble had not disclosed this information, the CFO Paul Jackaman said that this was “not relevant”. Mr Jackaman is now discussing the restructuring of this bond with you. The atmosphere of the meetings must be a bit awkward. One question you may ask him is “Mr Jackaman, is there a lot of “not relevant” information about Noble that we should know before we make another decision that might cost us a fortune?”. Please email us his answer.

There is no “new management” at Noble as we sometimes read. It is the same people who sank this ship. If only they were good at their job, not particularly honest, but at least competent. They are not. The disastrous cash flow performance of this company and its seemingly unstoppable collapse prove it.

The lawsuit between Noble and us is another example that shows that nothing has changed. It is still ongoing, hardly progresses, and everybody knows Noble will have to drop it eventually. This management pursues the same futile efforts to vindicate its past actions that caused this mess and your financial loss. As we repeatedly said, this lawsuit has only strengthened our determination. We will continue to publish and we will assist the stakeholders who want to legally go after Noble’s managers or its auditor to recover their money.

A change in this toxic culture and in the few people who personify it is essential and urgent if you want to put this company back on its feet. Noble needs new senior managers, ideally coming from another commodity trading house. They will bring competent traders with them, with an old-fashioned mentality: a trader is paid to make money and responsibly manage risk. If he loses money, he’s gone. Nobody will save his P&L with fictitious fair values.

Top management will have to disclose remuneration, which will be aligned to real performance. Unnecessary costs will be cut. For example can somebody explain why Noble has three PR firms in addition to its own PR department? EY that has completely lost credibility will be replaced by an auditor that can rebuild confidence in the accounts.

Then at that time when the market knows that the key people who are responsible for this fiasco are gone, when confidence in the financial statements and risk management comes back, then banks and counterparties may be willing to increase their lines, and Noble may have a chance to survive.

Alternatively, you may continue to put your fate in the hands of Noble’s management. But please don’t forget one thing: whatever happens to your bonds/loans, these managers are still earning their salary and their bonuses, and they still refuse to disclose how much they are paid. For them, everything is fine. So unlike you, they enjoy the journey and they want it to be as long as possible.

Iceberg Research