Date: June 2, 2016
In response to concerns raised by shareholders arising from Noble Group’s announcements today, I spoke with Mr Paul Jackaman, Group Chief Financial Officer this afternoon.
Foremost in the minds of shareholders is the question of liquidity. Why is the Company now proposing a rights issue? It was only recently at the AGM, the then CEO assured the shareholders that the Company is working towards making it profitable within the next 12 months. What has changed since then to warrant a rights issue? The Company assured that it would be bringing down the gearing ratio, re-finance facilities to bring the Company to profitability. Is the rights issue really to get the ratings upgraded or is it just to shore up the balance sheet? There has been a lot of negative news coming out of the Company which has affected the confidence of the shareholders. What measures are being taken by the Company to shore up confidence in the market? Why did the CEO leave so suddenly and why is the Chairman timing his future exit right now?
Here are the questions raised by some of the shareholders and our responses following my conversation with Paul.
Q1: Why is the Company now proposing a rights issue? It was only at the AGM, then CEO assured shareholders that the Company is working towards making is profitable within the next few months. What has changed since then to warrant a rights issue?
A: Nothing has changed. The Company has gone through the re-financing and have secured USD 3 billion in funding, and they now need to move purposefully to reduce cost of capital to ensure profitability is secure. So, they’ve pledged to raise USD 1 billion by year end at the time of the Q1 results and today’s rights issue takes us half way to that target. To ensure that there is no further doubt about the Company’s financial standing they have also decided to raise a similar sum by selling NAES.
The rights issue announced today is consistent with the strategy that the Company has been communicating with shareholders. From as far back as a few years ago, they have been taking actions to put the Group back on a path where it is able to execute on its core competencies of being an asset-light trader and to bring the balance sheet back to a position of strength. They have accomplished a lot along this vein over recent period, including the repayment of US$1.2 billion of debt through various bond redemptions, divesting of Noble Agri, and downsizing of its metals business.
Even though they have taken meaningful steps towards this, we believe that a significant improvement to their credit position will place a firm foundation under the Company and position the Company for growth in the future.
The Company shared at 1Q16 results that they would deliver at least an additional US$1 billion in liquidity by redeploying capital employed from low-return businesses, non-core asset sales and other capital-raising initiatives. The rights issue announced today is aligned with what they have articulated.
Q2: The Company assured that it would be bringing down the gearing ratio and re-finance facilities to bring the Company to profitability. Is the rights issue really to get the ratings upgraded or is it just to shore up the balance sheet?
A: The Company’s priority now is to have the strongest possible balance sheet. At the last results, they demonstrated how they have successfully reduced net debt and shared that they would continue to improve on that with a conservative net debt to capitalization target of 45% (down from 52% as at 1Q16). There is further de-gearing coming through the funding initiatives are to reduce cost of capital and ensure there is no constrained access to working capital.
By successfully refinancing their unsecured revolver and US borrowing base in May, Noble Group has removed all 2016 liquidity risk and by announcing the sale of North American Energy Solutions and the capital raise, together with continuing to shrink capital in lower performing businesses the Company has also removed risk from the refinancing of their 2017 debt. The rights issue is part of the Company’s strategy to recalibrate their capital structure, but also a way for it to position the Company for financial flexibility to take advantage of opportunities. It is also a further strong statement by their two largest shareholders – Mr Elman and China Investment Corporation – that they continue to support the company.
Q3: There has been a lot of negative news coming out of the Company which has affected the confidence of the shareholders. What measures are being taken by the Company to shore up confidence in the market?
A: Noble Group’s bonds have rallied strongly on the back of today’s news because there is firm recognition that they are bringing their capital structure and the Company back on track.
We would encourage shareholders to take into consideration how the executive chairman and largest shareholder, Mr Richard Elman, along with another key shareholder, China Investment Corporation, have given irrevocable undertakings for their rights shares, in recognition of the Company’s prospects. This move by the key shareholders further aligns their interests with those of minority shareholders. The Company is also looking to right size the business to become a smaller, more nimble company, that goes back to its core competencies as a physical merchant. This will also allow them to cut costs significantly too. As mentioned on an investor call this morning they articulated plans to cut at least 20% of our costs and headcount (including the sale of NAES)
With the announcements made today and earlier in the week, the Company has already surpassed the targets they have set previously and intend to continue exceeding expectations.
Q4: Why did the CEO leave so suddenly and why is the Chairman timing his future exit right now?
A: As the executive chairman stated during the investor call this morning, the Group is grateful to Mr Alireza for his contributions to the Group over the past few years. His expertise in capital restructuring helped to guide the Group through a very challenging period and he played a pivotal role in the successful sale of Noble Agri. As mentioned in the Company’s statement released earlier this week, he was also instrumental in securing the recently announced re-financing, a crucial element in putting the Group back on a stable base. With this transformation largely complete, Mr Alireza considered that it was the right time for him to move on.
Mr Elman is not exiting the business. He is merely announcing that he will be stepping down as executive chairman. The process to identify a successor to assume the role of non-executive chairman has been put in place and as completion of the robust process is expected to take some time, the Company has announced this in advance.
David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)
