This was a lesson I won’t forget.

The meeting started at 8.30am. I was running late.

I rushed down to Capital Square in Raffles Place. I slipped into the meeting room - a small, compact room just enough for about ten people. On the right side of the long, brown mahogany table, five or six executives in full black suits, name cards in hand. Among them was the CEO of Noble Group.

After I exchanged name cards, I took the only empty seat across the table, joining three other investors. I was late… But better late than never.

This was about ten or twelve years ago. I was still working as a fixed income analyst.

It was Asia's biggest commodity giant

Noble Group just released their latest financial results. Back then, it was common for investment bankers to bring companies around to meet their investors. Mostly to share their financial results. Sometimes, companies wanted to bring their story to investors ahead of a new deal. And I was about to find out what the deal was.

"We were looking to raise debt,” Management said, “to refinance our existing liabilities.

Noble Group was one of the biggest Singapore-listed commodity players. And management painted a far rosier outlook for the commodity giant. But I learnt it had one big problem: a massive pile of coal contracts carrying what the company called “significant fair value gains.”

Why I avoided this 6% yield

Here’s what the company was doing: They took current coal prices and extrapolated them upward, year after year into the future. Any financial analyst will tell you this results in grossly overvalued coal contracts, inflating the balance sheet to justify borrowing.

In fact, Noble had borrowed a ton of debt - a total US$6 billion. While their shareholders equity sits at only US$5 billion.

As an analyst, I found the way Noble Group valued its coal contracts odd.

Yet back then, Noble was still successfully raising US$400 million of perpetual securities. That was what the meeting was for. Perpetual securities are a kind of bond that has no maturity date. Think of it as preference shares. And there were many institutional investors clamouring over it. Why?

The yield was a solid 6%. Even though it doesn’t sound exciting today, in a low interest rate environment about a decade ago, any reliable high yield bond was attractive enough for the most conservative investors.

The problem was Noble needed to raise money. This is because the company had not produced cash from its operations in 2014. In fact, operating cash flow was a negative US$1.1 billion (see below).

And it had only US$903 million of cash sitting in the bank. That’s not a comfortable position.

A year later, cracks were showing.

A fierce short seller, Iceberg Research, betted against Noble shares, saying it’s worth only US$0.10 per share. A short seller is an investor who bets against a stock, thinking that the stock is going to fall.

Coincidentally at that time, Noble reported an unexpected quarterly loss - hit by a US$440 million “asset write-off”.

What I've learnt about income investing

Noble was once Asia’s biggest commodity trader. In 2018, the company declared bankruptcy. Noble was de-listed from the Singapore Exchange. And shares collapsed 99%. In fact, years after Noble Group’s restructuring in 2018, the was taken action by the Singapore authorities for misleading information in its financial statements. The MAS fined Noble a penalty of S$12.6 million.

Noble’s collapse taught me a powerful lesson. Over the years as a fixed income analyst and now a full-time investor, I focus on looking at the numbers first. I rather pay attention to the facts - no matter how management paints the story of a company.

Willie Keng, CFA

Founder, dividendtitan.com

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