Noble Group responds to SGX queries over sizeable FY17 non-cash losses

COMMODITY trader Noble Group has provided some clarification to the exceptional losses it booked last year, in response to queries from the Singapore Exchange (SGX).

Noble recorded an exceptional loss of about US$2.15 billion last year after applying additional non-cash reserves and making valuation adjustments to its net fair value gains on commodity contracts and derivative financial instruments.

It explained on Thursday that its change in reserving approach was the result of a board-mandated detailed reassessment of the group's balance sheet reserves as part of the strategic review commenced in May last year.

Noble said it had to make the adjustments after it posted a loss in the first quarter last year, which caused lenders to react and hurt its access to funding.

"The group experienced both credit rating downgrades and constrained access to bank financing following the announcement of a loss for the first quarter. This was demonstrated as a reduction in the size of the Group's bilateral trade finance facilities with banks, additional cash margin posting requirements under these facilities and an increase in the cost of these facilities," Noble said.

Noble said the breakdown of the US$2.15 billion exceptional loss comprised:

- US$600 million of reserves and valuation adjustments recorded in the second quarter, including applying additional reserves to certain contracts as a result of adverse back testing results and the impact of credit rating downgrades on discount rates.

- US$600 million of reserving adjustments in the second quarter following a "dislocation" in coal markets that reflected a significant change in observable valuation inputs.

- US$650 million recorded in the fourth quarter from increases in the discount rate used in the group's valuations, including the impact of further credit rating downgrades and the Group's increased cost of funding as reflected in its trade finance facilities. In its statement, Noble also briefly explained how it obtains its valuation models and discount rate curves.

- US$300 million recorded in the fourth quarter from applying additional reserves and valuation adjustment to certain contracts. These amounts were determined based upon changes in the assessment of recoverability under certain contracts, including due to non-performance, dispute or commercial re-negotiation.

Noble also recorded a US$903 million non-cash loss on impairment and disposal of non-current assets last year.

It said this was contributed by:

- Impairment losses of US$169 million for property, plant and equipment, owing mainly to a write-down of Noble's palm plantation assets held for sale (US$80 million).

Noble also booked a US$44 million impairment for its dry bulk carrier vessels, taking into account increased discount rates and projections of future operating costs.

It also wrote off US$37 million in capitalised information technology costs, largely relating to divested or contracted business units.

- Impairment losses on investments in associates of US$113 million.

Of this, US$32 million came from the full impairment of Australia-listed Baralaba Coal, which went into voluntary administration in July 2017 following an unsuccessful attempt to raise adequate funds to re-start the Baralaba North Mine.

Another US$19 million came from the full impairment of Australia-listed East Energy Resources, which requested a voluntary suspension of its securities in September 2017.

Noble also reduced the carrying value of its investment in Australia-listed Aspire Mining by US$28 million to reflect a lower quoted market price, after raising its stake in Aspire last year from 10.4 per cent to 19.9 per cent.

Noble also took a US$35 million impairment on PT Atlas Resources to its market price, after reclassifying Atlas from an associate to a long term equity investment, since Noble no longer exercises significant influence over Atlas.

- Impairment losses on prepayments and other receivables of US$169 million