Goldilocks and the 3 Bears - A Financial Fairy Tale - Part II Noble Group

Die gescheiterte Hoffnung

Part II of a three-part series.  Part I here.

Goldilocks foray into the Noble Group has already been analyzed in an excellent detailed post by Arkad.

There is no point in my doing any analysis. So I’ll just post the link.

This quote by Arkad should serve as a teaser to spark your interest in taking a side trip away from Suq Al Mal, if indeed you need any teasers at all.

As of Friday 9th November [2018], Noble’s share price closed at SGD 0.089. Goldilocks’ average entry price was SGD 0.50. Goldilock’s USD 38.8mn investment is now worth USD 6.9mn – effectively a -82% loss.

Since Arkad wrote this post, Noble Group Ltd (the “old” company) delisted. After a debt restructuring, the successor company Noble Group Holdings emerged.

Old Noble shareholders were given 20% of the equity in the new company with creditors taking 70% and management 10%.

Clearly a sign of extreme financial distress in the old company. No doubt a source of distress of another kind among its “old” shareholders.

According to the restructuring of Noble Group Ltd (Old Noble) shareholders received 1 share in Noble Group Holdings (the Newco) for each ten they held in Old Noble.

That means Goldilocks was entitled to 10,756,450 shares. Noble Group Holdings as some 663,761,605 shares par value USD 0.01.

That gives Goldilocks a 1.6205% shareholding versus its 8.19% shareholding in the old company. That’s dilution with a capital “D”.

Not a good start.

But that’s not all the bad news.

Noble Group’s 3Q2019 financials contain scant evidence of any comfort for Goldilocks.

Net loss of USD 47 million for the nine month period.

Comprehensive loss of USD 71 million.

Noble Group Shareholders’ total equity at USD 60 million down from USD 130 million as of 31 Dec 2018.

Based on book value as of 30 September 2019 and Goldilocks’ 1.6205% ownership, its investment is worth USD 972,317. Or a loss of some 98% of the initial investment.

If we look at equity as of 31 December 2018, the loss is only 96%.

Whether Goldilocks reflected the full loss mentioned above or used the last stock price, it would have taken a 2018 loss between USD 32 million to USD 37 million.

If you’re keeping track and AA sure is, the losses in FY 2018 from GFH and Noble total some USD 60 million.

On its face Noble seems a perplexing choice for an investment given Goldilocks stated investment strategy as “Goldilocks invests in listed equities with a long-term goal to compound our capital at an above average rate of return while minimizing the risk of loss of capital by taking a constructive activist role in listed companies to unlock value.”

The point I’m focused on is the bit about risk control.

It was pretty clear that Noble’s problem was not one of inefficiency in its operations.

There was little “unlocked” value apparent.

Rather it was a distressed firm burdened by debt which exceeded its repayment capacity. 

Investors usually “play” this sort of situation for the short term. If one thinks the company has a future, buy the debt at a distressed price and then flip it when the price rises. 

Or buy the debt at a discount and hold on to it assuming that the debt will be exchanged for equity at a very favorable “price”. Equity which one can then “unload” at a profit.

Why?

Because when creditors restructure a distressed company, they focus on getting paid back. 

Debt service not new investment in the business is prioritized. Lack of funds also erodes the existing franchise.  

Dividends curtailed. 

Often sadly assets are fire-saled at less than fair values in order to reduce debt.

In the most extreme cases creditors take equity away from the previous shareholders.

And debt restructurings are multi-year affairs. Sometimes more than one restructuring is needed.

So the constraints on growing the business reman for years.

”Constructivism” via the Board won’t work because the Board’s hands are tied by the restructuring agreement.

None of this should be “news” to sophisticated investors. There are abundant historical case histories.

The “sad” story of Global Investment in Kuwait or the even more tragic story of TID are well known. The latter locked in Satrean "No Exit".

Why Goldilocks took this rather perilous path isn’t clear.

So far not so good, but Goldilocks struck “gold” on the next investment.