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Cash call, founder's exit plan maul Noble's shares

Stock dives up to 15% on proposed rights issue at 60% discount to Thursday's closing price



SHARES of commodity trader Noble Group tanked on Friday after it unveiled a US$500 million one-for-one rights issue, priced at an over 60 per cent discount to its Thursday's closing stock price.

Noble fell by as much as 15 per cent to S$0.255 in the early afternoon on Friday, before ending the day at S$0.26, wiping out more than S$250 million from its market value. About 220 million shares changed hands, making it the most actively-traded stock on the Singapore Exchange.

The counter opened at S$0.29 after resuming trading at about 10.10am. Noble had before the market opened requested for a brief halt as it announced the new rights issue, and the impending - but not unexpected - stepping down of its founder and executive chairman Richard Elman.

In the announcement, Noble proposed a fully underwritten rights issue with net proceeds of about US$500 million.

The rights issue will comprise one rights share for every one Noble share, issued at S$0.11 apiece. This marks a 63 per cent discount to the closing stock price of S$0.30 on SGX on Thursday (the last trading day before the rights issue announcement), and a 46 per cent discount to the theoretical ex-rights price of S$0.205.

Mr Elman has given an irrevocable undertaking to procure subscriptions for 625.5 million rights shares (representing 9.6 per cent of the maximum number of shares to be issued), though this is less than his full entitlement through Noble Holdings Ltd.

China Investment Corporation (CIC), Noble's other key shareholder, has given a similar undertaking for 630.6 million rights shares (representing 9.6 per cent) for which it is entitled. The remainder of the rights issue has been underwritten by a consortium of banks comprising HSBC, Morgan Stanley Asia, DBS Bank, Société Générale and ING.

The rights issue, together with the sale of Noble Americas Energy Solutions announced last Monday and the previously announced sale of low yielding assets as well as working capital reduction measures will collectively yield US$2 billion in additional liquidity over the next 12 months.

This liquidity, said Noble, will further reduce net debt and improve the group's financial flexibility. It also "follows through" on Noble's earlier commitment to raise US$1 billion in liquidity by end-2016, said the group.

Fitch Ratings said in a note on Friday that Noble's rights offering will not affect its rating (which the ratings agency had already downgraded to BB+ in a May 17 note), as the group is "constrained by its short-term focused funding structure and difficult operating environment".

Other analysts were more upbeat. Religare Capital Markets analyst Nirgunan Tiruchelvam said that the rights issue proceeds will bolster Noble's balance sheet, which has been hampered by US$4 billion of fair value gains.

Margaret Yang, market analyst at CMC Markets Singapore, added that the rights issue marks the company's efforts to raise capital from shareholders to improve its balance sheet and repay some of its debts. But as its rating has been downgraded to junk, the cost of borrowing from the credit market is likely to be more expensive, she cautioned.

Ms Yang noted also that the rights issue could "suppress" Noble's share price in the near future. "And investors' confidence is likely to get hurt by the chairman's step-down plan."

Noble, in its announcement on Friday, said that 76-year-old Mr Elman, who founded the firm 30 years ago, "wishes to step down as executive chairman within the next 12 months".

At his request, the board will set up a sub-committee to look into his succession. The sub-committee, chaired by non-executive director David Eldon, will identify a successor for the role of non-executive chairman.

In recognition of CIC's "support for the company", CIC will be entitled to a second non-executive director, in addition to the current appointee that it has on the board, Noble added.

The group will also seek to appoint an additional independent non-executive director with a background in international commodities and futures trading.

Last week, in a move that surprised the market, Noble said Yusuf Alireza was resigning as chief executive officer with immediate effect due to "family reasons". He will be replaced by co-CEOs - executive director William Randall and Noble Americas president Jeff Frase.

At the same time, Noble said it will sell Noble Americas Energy Solutions, one of its more profitable business units, for cash to strengthen its balance sheet.

On Friday, Noble also unveiled an expanded cost-cutting programme, comprising the sale of ownership stakes in select low-returning assets, and the continued reduction of working capital in these businesses globally. It also confirmed the continuation of an operating cost-reduction programme, which will reduce headcount, among others.

Noble's shift to an asset-light model is seen as a "positive" by Religare's Mr Tiruchelvam. "Noble is shedding its fixed assets as it seeks to become a pure commodity trader. It is likely to shed more of its fixed assets, particularly in the mining sector. We see value, as the stock is trading at 65 per cent discount to book value."

The analyst, in a note released on Friday, issued a "buy" rating on the stock with a target price of S$0.56.

In response to concerns raised by David Gerald, chief of the Securities Investors Association (Singapore) or Sias, Paul Jackaman, Noble's group chief financial officer said: "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."

Mr Jackaman had met Mr Gerald on Friday at the Sias office, said a statement from Sias.