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.

Goldilocks and the 3 Bears - A Financial Fairy Tale - Part 1 GFH

Only One Bear Had the Right Meal for Goldilocks

In an earlier post I noted that the disappointing FY 2019 performance of the Goldilocks Fund—a loss of 7% for the year—didn’t explain the rather large drop in cumulative performance since inception (July 2015) from 219% for the first ten months of 2018 to 134% for 2019.

And promised to take a closer look at what happened with a series of three posts on Goldilocks and the Three Bears.

The three bears in this tale are: GFH Financial Group, Noble Group, and Dana Gas.

We’ll start with the first.

Before we do, a few words on methodology. I’ll begin by reviewing the history of Goldilocks investment in each “bear”.

Then I’ll compute the return to actual exit or if the fund still holds the asset until a current date.

Afterwards I’ll look to allocate the loss or gain over fiscal years.

On 8 January 2018, Goldilocks announced it had taken an approximate 4.99% stake in GFH a Bahrain-based Islamic financial institution that has been struggling for some years. An appropriate target for Goldilocks to work its constructionist magic as abundant posts on this blog indicate.

As of 31 December 2017, GFH had 3,681,650,441 shares issued and outstanding. Goldilocks actually appears to have acquired a 4.987% stake or 183,612,310 shares.

At a rough estimate of trading prices around that time of USD 0.42 per share that’s USD 77,117,170.

But how did it acquire these shares?

With GFH’s trading volumes a purchase of this sort even over a prolonged period would likely increase the entry price.

Situations like this are what friends are for!

From an analysis of disclosures in the equity notes in GFH’s annual financial reports, it appears that Goldilocks bought its shares from ADFG/IC.

According to GFH’s 2016 audited annual report, at year end, Integrated Capital held some 13.38% of GFH’s shares. One year in GFH’s 2017 audited annual report, it held 8.01%. 

Supporting a purchase from ADFG/IC is a record of an insider trade on Mubasher by Integrated Capital on 7 January selling 243,377,750 shares at USD 0.40 per share. 

Using that price, Goldilocks’ entry cost would be USD 73,444,924.

We’ll use this as the assumed entry price.

There’s no explanation who bought the 59,765,440 in additional shares sold. Sold to ADFG or “sold” to a lender to secure financing?

So how did GFH make out on its investment? GFH basically exited GFH in 2020.

On 22 January 2020, as part of a clarification regarding AlHilal Bank’s 5.3% shareholding, GFH revealed that Goldilocks held only 0.39% of its shares. It also noted that the ADFG/IC group and related parties held 9.69% of GFH’s shares. 

For those who follow AFDG/IC note that Reem Finance is listed as a related party in the announcement.

So Goldilocks must have sold its shares to a party or parties considered to be outside the ADFG/IC “group”. 

Assuming that GFH is not tardy in reporting significant changes in major shareholders’ and related parties’ holding of its shares, we can assume that purchase took place in December 2019 and early January 2020.

Let’s assume 1 December 2019 through 22 January 2020.

Looking over daily trading records at the DFM for GFH, this sale does not appear to have taken place on the DFM.

That’s also supported by the fact that the total value of GFH stock traded during the period was some USD 78.4 million equivalent over 3,622 trades.

Why look at the DFM?

Because roughly 74% of GFH’s shares are held and traded there.

What that probably means is that the shares were sold to another investor or investors “off the market” in a single or several “large ticket” transactions. 

AA will be looking at disclosures in GFH’s FY 2019 audited financials to see what information we can glean on who the new shareholder(s) are. Distribution of share ownership in the equity note and any disclosures about major shareholders.

Not by any means an easy task. In conformity with local regulations GFH only reports details on shareholders with 5% or more.

Because Goldilocks sold roughly 4.6% of GFH’s shares unless that shareholder already had holdings of 0.4% we’re not likely to learn its identity.

Let’s turn to the more important question, How did Goldilocks fare on its investment in GFH?

First, let’s estimate Goldilocks exit price.

The average price of GFH stock on the DFM between 1 December 2019 and 22 January was USD 0.2332 (based on DFM closing price data during the period). 

2017 and 2018 cash dividends (paid in 2018 and 2019) add another USD 0.0311 per share so total realized is USD 0.2633.

Based on AA’s assumptions (note that word), Goldilocks bought at USD 0.40 a share and sold at USD 0.263 a share. On its original investment of 183,612,310 shares, it lost USD 0.137 per share or USD 25.2 million. That includes the unrealized loss on shares it didn’t sell (the 0.39%).

Also during 2019 Goldilocks received roughly 10,373,577 in bonus shares which at current values are worth some USD 2.4 million.

That means its loss on the GFH investment is about USD 23 million. Or roughly 31%

This assumes that the above price assumptions are reasonably correct. It also assumes that Goldilocks did not have a price guarantee or favorable put option from IC.

Let’s now allocate that performance over FY 2018 and 2019. Essentially that consists of two allocations: one for dividends (cash and stock) and another for mark-to-market.

As you’ll see from the chart below, the loss was essentially booked in FY 2018 with dividends offsetting further mark-to-market losses.

Goldilocks Investment Returns in GFH
Millions of US Dollars (except share price)
			Dividends
Date	Price	MTM	Cash	Stock	TOTAL
08Jan18	$0.40
31Dec18	$0.25	-$27.5	$4.2	$0.0	-$23.3
31Dec19	$0.23	-$3.7	$1.5	$2.4	$0.2
20Jan20	$0.23	$0.0	$0.0	$0.0	$0.0
TOTAL		-$31.2	$5.7	$2.4	-$23.1