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Diving Deep As Noble Group Limited Hits An Iceberg

Last weekend, the little known blogger Iceberg-Research issued its third report on commodities trader Noble Group Limited (SGX: N21).

The report discussed Iceberg Research’s issues with Noble Group’s corporate governance and the possibility of the company understating its debt level. (More’s to come on the third report shortly.)

As for the two earlier reports, I’ve taken a look at them previously and you can find my thoughts on the reports in here. Noble Group has responded to Iceberg Research’s third report, stating in an official announcement: “We reject their allegations as inaccurate, unreliable and misleading.”

In addition, the company also revealed in the same announcement that it has decided to start legal proceedings against Arnaud Vagner and Enlighten Ace Ltd for “conspiracy to injure Noble Group.”

Judging from the sequence of events thus far, one might assume that Vagner, a former credit analyst for Noble Group, has a relationship with Iceberg Research. It must be noted though, that Noble Group has not drawn any explicit links between the duo of Vagner and Enlighten Ace and Iceberg Research.

With all that as a backdrop, let’s take a look into some of the details of Iceberg Research’s third report. I’ve taken a look earlier today at some of the corporate governance issues raised by Iceberg Research. So, in here, let’s take a look at some of the accusations the blogger has made about the debt level of Noble Group.

Understating all that debt

According to Iceberg Research, Noble Group has significantly understated its debt levels in an attempt to portray itself to be in a stronger financial position. There are four main areas to Iceberg Research’s accusations:

1. Noble accounts the perpetual securities it has issued under equity.

Iceberg Research claims that Noble Group has misrepresented its debt level by accounting the perpetual securities it has issued as 100% equity; the common practice that credit agencies use, as stated by Iceberg Research, is to account for perpetual securities as 50% debt and 50% equity.

If Noble Group was to treat 50% of its perpetual securities as debt, it would be adding roughly US$200 million to its debt level. For some perspective, Noble Group had total debt of US$3.97 billion as of end-2014 according to its latest filings.

2. Noble Group counts cash that’s tied up as collateral when it calculates its net debt level (where net debt = total debt minus total cash).

According to Iceberg Research’s report, this is misleading. Roughly US$350 million in cash that Noble Group uses to calculate its net debt level is actually tied up as collateral in the company’s contracts with customers and/or suppliers. The actual unencumbered cash available is only about US$554 million.

3. Noble Group factors in its US$2.2 billion worth of inventories as a possible asset which can be used to repay debt.

Noble Group’s logic here is that since its inventories are mainly different types of commodities which have public and easily-available pricing information, they can easily be converted into cash with which to repay debt.

But, that is true and possible only if Noble Group does not owe any money to its suppliers. Noble Group actually has about US$8.1 billion worth of account payables on its books. This means that the US$2.2 billion in inventories might not really be available for use to settle any possible bank debt repayments because Noble Group would most likely need to pay off its suppliers first.

4. Noble Group had disregarded its corporate guarantee to Noble Agri’s debt.

After the reclassification of Noble Agri as an associate/joint venture of Noble Group, Noble Group also moved Noble Agri’s borrowings out from its own balance sheet. That is a correct thing to do and is in accordance to accounting standards.

But Iceberg Research’s report stated that much of the US$3.4 billion of borrowings owed by Noble Agri is being guaranteed by its shareholders – with Noble Group’s 49% stake in Noble Agri, the former is still on the hook for nearly US$1.7 billion in borrowings.

Foolish Summary

Whatever that Iceberg Research has pointed out have huge implications if they are true. By Iceberg Research’s calculations, Noble Group might be overstating its shareholder’s equity by more than US$4.5 billion, a figure’s that’s nearly 88% of Noble Group’s current reported shareholder’s equity.

But, with Noble Group’s response that Iceberg Research’s allegations are “inaccurate, unreliable and misleading,” it’d be interesting to see what happens next.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.