The Idiosyncratic Risks of Commodity Trader Noble Group



Summary: we maintain the call made in Noble Group’s Kurtosis Awakening Moment for the Commodity Markets in which we profiled the ongoing fast-motion trainwreck of Asia’s largest commodity trader.

There is the investment thesis behind the Noble Group credit downgrade and also some idiosyncratic risks with this trader unrelated to the commodity market sell-off.

S&P will be forced to act.

There are definitely some idiosyncratic factors with Noble Group.

People won’t care about the vast PR effort recently undertaken by the commodity trader.

The trader has broken the single most important principle in the commodity trading industry: Trust.

“Trust is just about everything in commodity trading; it is also what is maintaining a constant risk premia in this market”.

Trust means everything in commodity trading, it is the only reason why end-users will knock on your door, will make business with you and no one else.

-Otherwise they could go on the internet and pick-up any shipbroker to do business.
-Otherwise anybody can open the yellowpages and pick someone to sell or buy their commodities.

-Otherwise any farmer  would pick a random trader to price their grain…

NOBLSP 2020 bonds

Noble group saw its 2020 dollar bonds fall to the lowest since October 2011 on Tuesday as the firm battles critiques  of its accounting.

(amongst the most vocal pundits; the “ICEBERG”, Muddy MattersGMT research and Zero Hedge) [1]

noble 2020 bond

According to Bloomberg, Lekas, who oversees $1.4 billion at Leader Capital Corp. in Portland, Oregon, trimmed about a quarter of his holdings in the past two months based on his modeling’s signals. That included Noble Group Ltd.’s 2020 notes before they fell almost 20 percent.

It is the message that the market is sending; until July Bonds of Noble Group were quasi intact and now they are  pricing junk rating.

NOBLE 5 YRS CDS  continues its Meteoric Rise.

Noble Group CDS 5yrs

Noble Group  swap has “stabilized” at 1000 bps level (e.g it now costs 1 M$ to insure a 10M$ tranche of debt).

Such a massive move implies that commodity trader is downgraded by Standard & Poor’s and kicked-out of the capital markets.

Our macro-template for how the downgrade works like this:

  1. The stricter regulatory environment in which banks and hedge funds are now operating supports credit investors, not what is off-the-book. Under Basel III, FED tier-one test, HY commodity-exposed paper becomes too costly to carry on Bank’s B/S.

  2. The Fed’s move in 2015 will level-up all parts of the financing curve.

  3.  Fed is tightening the prompt part of the curve in the 2015, hard to roll billis at sub 2% each 3 mths (accounting hocus-pocus or not)…

  4. S&P also incorporates high concentration of short-term debt in their outlook.

  5. However since S&P does NOT based their CREDIT outlook on off-balance sheet liabilities used by trader (repos, revolving L/Cs), what must go up ?

There is the investment thesis behind the credit downgrade and also some idiosyncratic risks with Noble Group.

 Accounting Hocus-Pocus

We are maintaining the call and the views expressed in ThisisNoble’s Farewell, (especially our prescription pertaining to commodity VaR and how it should be disclosed). The market message is univocal: if you have the energy, intelligence and integrity, but lacks of the latter, it will not care about the two former (even after 4 straight hours of presentation).

When a major trader is on the brink of, and the market is pricing an event, the commodity market and market risk become extremely fungible. [2]

This fungibility aspect becomes crucial, particularly during times when banks and large institutions rush to transfer their risks to the capital markets instead of warehousing them.

It is time to revisit E (like the 1st letter in the company named Enron).

                                                                                                                    Simon Jacques


[1] We are pleased to add the “politically incorrect” Industry Activist Simon Jacques also known for its candid opinions to this list.

[2]Zero Hedge  08/18/2015:

© 2015 Navigating the commodity markets with Freight and Spreads




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