The Chain: Noble Group’s Deforestation Risks Further Sinks the Ship

In 2013, Noble Group was among the 100 biggest companies in the world by revenue. Since then, its shares have fallen 97 percent since their 2014 highs. Noble Group’s shares closed on Wednesday June 7, 2017 at USD 0.24. S&P Global stated they have put Noble Group at risk for default within the year.

Noble Group has almost USD 2.1 billion in debt due in 2018. By end of 2018, Bloomberg reports that Noble Group must repay:

  • USD 600 million on its borrowing facility.
  • USD 379 million on a bond repayment.
  • USD 1.1 billion on its revolving credit facility.

Two of Noble Group’s loans for its May 2018 revolving credit facility have also collapsed in the past month. They are now trading at USD 0.59 and USD 0.50, down from USD 0.91 in early May, 2017. Last week, Noble’s 2020 bonds decreased in value from USD 0.60 to USD 0.36.

Noble Group’s Q1 2017 adjusted net loss was USD 42 million. This equals USD 0.17 per share excluding items. Noble Group’s reorganization resulted in a noncash discrete tax item totaling USD 260 million, which led to a net loss of USD 302 million or USD 1.24 per diluted share. Noble Group Executive Chairman Richard Ellmann’s resigned May 11, 2017.

Finally, Noble Group’s palm oil business suffers from both potential weak High Conservation Value (HCV) assessments and poor Roundtable on Sustainable Palm Oil (RSPO) checks.

Despite this record, Noble stated on p. 17 of its 2016 Annual Report that:

Since 2013, permanent conservation departments at both plantations have been responsible for implementing our integrated conservation master plan. We have published our sustainability criteria to illustrate our approach across critical areas, such as undertaking free, prior and informed consent, access social and environmental impacts, conservation of forest and high conservation values areas, maintain high carbon stock areas, no planting on peat and a zero-burning policy.

Noble Group: Institutional Investors Sell Because of Deforestation Risks

In July 2016, Chain Reaction Research (CRR) profiled Noble Group’s material sustainability risks related to deforestation.

Environmental Investigation Agency, Greenpeace, Yayasan Inisiasi Alam Rehabilitasi Indonesia, and Aidenvironment have filed a complaint with RSPO with HCV Resource Network (HCVRN) against Dr. Nyoto Santoso. Santoso’s RSPO HCV assessments have covered 520,000 hectares (ha) for 34 plantations in Indonesia. This complaint follows behind RSPO’s stop work order covering seven palm oil concessions owned by Goodhope. Noble Group hired Santoso to conduct HCV assessments for both of Noble’s Papau, Indonesia palm oil concessions.

HCV assessment reports were already previously cause for the Norwegian investment fund KLP to divest.

Santoso has not issued a publicly available reply.

Noble Group’s actions have had material negative financial reactions from investors. For example, June 1, 2015 Norwegian KLP Investment Funds divested from Noble Group stating:

“Neither of the two HCV assessments provides well-founded answers to the question of whether intact forest will be converted into plantations… both concessions are located in areas of unusually rich and unique biodiversity…in KLP’s opinion, an unacceptable risk that Noble Group’s current and future conversion of rainforest to oil palm plantations in these two concessions will cause severe environmental damage.”

And now, despite Noble’s significant global assets, Noble Group is struggling to refinance its loans. Their recent financial troubles have added to the cost of issuing new shares and debt. As an example, on March 9, 2017, the company raised USD 750 million by issuing five-year junk bonds with a 8.75 percent coupon. Their recent debt financing and junk rating means it will be more difficult for Noble Group to refinance their bank loans.

Noble Group: Palm Oil Assets Are No Lifeline

Noble Group’s Noble Plantations Pte Ltd has a majority ownership stake in two Indonesian concessions. Noble Plantations total land bank is over 69,000 ha. Since October 2011, Noble Plantations has been an ordinary member of the RSPO. It concessions passed RSPO’s New Planting Procedure (NPP) in 2012 and 2014 respectively. Their plantations assets are:

  • PT Henrison Inti Persada (PT HIP) in Sorong (32,000 ha), see below (Figure 1).
  • PT Pusaka Agro Lestari (PT PAL) in Mimika (37,000 ha), see below (Figure 2).

As shown below (Figure 1), Noble Group’s PT Pusaka Agro Lestari (PAL) is actively deforesting forests.

From 2013 to 2015, Noble Plantations deforested 11,500 ha in forest and peat lans. To confirm this assertion, Aidenvironment cross-checked governmental land cover maps with historical satellite imagery. Aidenvironment found allegedly that at most 23 percent of the forest in PT PAL’s concession may have been previously logged. It appears that PT PAL cleared most of this area from 2011 to 2014. By 2016, PT PAL had cleared an additional 6,500 ha of primary forest. Now, PT PAL is beginning to deforest the remaining 18,000 ha of primary forest in its concession.

Noble subsidiary PT PAL’s High Conservation Value (HCV) assessment failed to mention that the concession is 90 percent forested. The HCV assessment instead stated it was 11 percent forested. Local Indonesian government officials had previously temporarily revoked PT PAL’s working permits in 2014 due to negative community impacts.

Picture1Figure 1: Noble Group’s PT HIP deforestation, Papua, Indonesia, 2016-Current. Source: Aidenvironment.

As shown below (Figure 2), in 2017 PT PAL cleared 303 ha.

  • February 20, 2017 to 08 March 8, 2017, they cleared 173 ha of forest.
  • March 8, 2017 to April 25, 2017, they cleared 130 ha of forest.

Based on Indonesian Ministry of Environment and Forestry data, the forest cleared is categorized as “Secondary Dry Land Forest”.

Picture2Figure 2: Noble Group’s PT PAL deforestation, Papua, Indonesia, 2016-Current. Source: Aidenvironment.

Noble Group: But Potential Palm Oil Sales Accrue to COFCO

On September 30, 2014, COFCO Corporation with their subsidiary COFCO Agri Limited (CAL Group) – one of the largest agricultural and food industry companies globally – purchased a 51 percent controlling interest in Noble Agri Limited (NAL) for USD 1.5 billion along with an investment group that included Hopu Investment, Temasek, IFC, and Standard Chartered Bank.

December 23, 2015, COFCO and its associated investment consortium purchased the remaining 49 percent controlling interest in NAL for USD 750 million. CAL Group received 1,509,937,328 ordinary shares for its USD 750 million purchase.

As part of the sale of NAL to CAL Group in 2014, Noble Group retained its palm oil business in exchange for a USD 64,449,000 promissory note issued to CAL Group. The note carries a contingent value right, under which Noble Group shall remit to the Cal Group, the proceeds of the palm oil business sale, less taxes, expenses and costs of sale. In return, CAL Group shall return the promissory note. The promissory note values Noble Group’s estimated 70,000 ha land bank at about USD 915 ha. This means that COFCO has a financial interest in Noble Group selling their palm oil assets because COFCO would receive the proceeds and return the promissory note.

While COFCO is a member of RSPO, COFCO does not appear to have a zero-deforestation policy that covers palm oil sourced from Indonesia.

Noble Group’s: Loans Have Sustainability Holes

As shown below (Figure 3), HSBC, ING Bank, Morgan Stanley, Société Générale, ABN Amro Bank and Rabobank – who participated in Noble Group’s March 9, 2017 USD 750 million junk bond issuance – all have sustainability policies with relevant deforestation-linked criteria. These policies combined with repeated financial support to Noble Group put these banks at reputational risk because Noble Group would use or would be perceived to use these funds to continue deforestation in Papua, Indonesia.

Last year, the 25 banks who syndicated Noble Group’s USD 1 billion May 2016 loan still remain exposed to financial risks. Out of the 25-bank syndicate, as of 2016, 12 have committed to sustainability policies (Figure 3). These practices bind these banks to not lend to or underwrite companies contributing to adverse climate change.

Out the 12 banks, five are RSPO member banks. These RSPO members are ING, ABN Amro, Rabobank, HSBC, and Citi. They jointly accounted for one-third of Noble’s USD 1 billion syndicated loan. Because PT PAL potentially cleared High Conservation Value (HCV) forests, Noble Plantation might be eligible for a formal RSPO complaint. RSPO disallows primary forest clearance and requires HCV certification bodies to review evidence. This evidence includes historical remote sensing imagery, prior to the certification body assuring that no primary forest was cleared after 1995.

This could negatively impact Noble Group’s existing banking relationships and further result in higher lending costs as Noble Group’s continued operation hinges on it securing a USD two billion loan. Mitsubishi UFJ Financial Group is reportedly arranging a USD two billion 364 day-facility to replace the USD 1 billion syndicated loan, at the following terms:

  • USD 800 million uncommitted tranche 185 basis points over LIBOR.
  • USD 1.2 billion committed tranche 195 basis points over LIBOR.
Bank Forests Human Rights Biodiversity Peat Policy Links
ABN Amro Yes Yes Yes No Exclusion list; Agri commodities policy; Forestry policy
Agricultural Bank of China No No No No CSR report 2014
Banco do Brasil No No No No Environmental Policy; Sustainability and environmental policies
Bank of America Yes Yes Yes No Forest lending policy; Forest Certification
Bank of China No No No No Committed to Environmental Protection
China Development Bank No No No No Annual Report 2015
Citigroup Yes Yes Yes No Forestry policy; Environmental Policy Framework
Commonwealth Bank of Australia No No No No ESG lending commitments
DBS No No No No
First Gulf Bank No No No No
Goldman Sachs Yes Yes Yes No Environmental Policy; Environmental Policy overview
HSBC Yes Yes Yes No Commodities policy; Forestry policy; Statement palm oil
Industrial and Commercial Bank of China No No No No CSR report
ING Yes Yes Yes No ESR Policy 2016
JPMorgan Chase Yes Yes Yes No ESG policy
Landesbank Baden-Württemberg (LBBW) No No No No Sustainability guidelines
Mitsubishi UFJ Financial No No No No ESG investment
Morgan Stanley Yes Yes Yes No Environmental Policy
National Australia Bank No No No No Dig deeper 2015; Our ESG risk principles
National Bank of Abu Dhabi No No No No Sustainability
Rabobank Yes Yes Yes No Sustainability Policy Framework
Société Générale Yes Yes Yes Yes Palm Oil Sector Policy; Forestry sector policy
Standard Chartered Yes No Yes No Environmental_and_Social_Risk_Assessment; Forestry
State Bank of India No No No No Business Responsibility Policy
United Overseas Bank No No No No Annual Report 2015

Figure 3: Noble Group’s Syndicated Loan Banks Policies, July 2016. Source: Chain Reaction Research.

Noble Group: Deforestation Risks Hurt Their Ability to Float

In summary, Noble Group’s primary forest clearance also possibly violates the company’s sustainability policy, its bankers’ policies, and it buyers’ No Deforestation, No Peat, No Exploitation (NDPE) policies from key buyers.