The Chain: Noble Group Up Because of Goldilocks While HSBC Palm Oil Policy Drives RSPO Inquiry

Noble Group has had a turbulent previous 2017. Adding to the turmoil, creditor HSBC has pushed for an investigation into Noble’s  environmental practices. The Roundtable on Sustainable Palm Oil (RSPO) has ordered Noble to halt further development of its palm oil holdings. Investors are sandwiched between volatile equity prices, a potential for default, and top executives fighting in court. From Q2 2014 to Q1 2017, Noble had only four quarters with positive operating cash flows and in Q1 2017, Noble Group adjusted net loss was USD 42 million.

Noble Group’s Financial Context

Monday, March 6,  Noble Group raised USD 750 million at 8.75 percent in a junk bond issuance. HSBC, ING, Morgan Stanley, Société Générale, ABN Amro, and Rabobank each participated in the issuance. Each have relevant rainforest protection policies in place.

Meanwhile, June 14, 2017, Bloomberg reported that Noble Group’s former CEO Yusuf Alireza has filed a lawsuit against Noble Group founder Richard Elman seeking USD 58 million in compensation. Alireza claims that he’s owed stock in the company.

In mid-June, Noble Group reached an agreement with its banks to extend its key USD 2 billion credit facility for 120 days from June 20, 2017. But Fitch stated:

The extension of Noble’s $2 billion borrowing base facilities by 120 days from June 20, 2017 does not provide evidence of medium-term funding stabilization.

Then on June 19-20, 2017, Noble’s shares have surged from five-year lows of SGD 29.5 cents June 9, 2017 as Goldilocks Investment Co. purchased 66 million shares over two days.

On June 26, 2017, Fitch Ratings downgraded Noble Group’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “CCC” from “B-” and its senior unsecured rating and the ratings on all its outstanding senior unsecured notes to “CCC” from “B-. According to Fitch, the move stemmed from Noble’s poor liquidity and weak profitability. One month earlier, Moody’s and S&P cut Noble’s rating to Caa1 from B2 and to CCC+ from B+ respectively.

On July 6, 2017, Goldilocks purchased 41.6 million more shares of Noble Group for SGD 23.2 million. Goldilocks now holds 107.564 million shares. Goldilocks’ direct interest in Noble is at least 8.19 percent, according to documents filed on the Singapore Exchange. Goldilocks is an indirect subsidiary of Abu Dhabi Financial Group.

July 11, 2017, Noble’s shares closed at SGD 66.0 cents, up from their June 9, 2017 low of SGD 29.5 cents.

Noble Group’s Indonesia Plantation Complaints

In July 2016, Chain Reaction Research (CRR) profiled Noble Group’s material sustainability risks related to deforestation suggesting that Noble Group’s RSPO certification was in doubt because of Noble’s deforestation of primary forest.

Noble Plantations total land bank is over 70,000 ha. Noble Group’s 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, Indonesia.
  • PT Pusaka Agro Lestari (PT PAL) in Mimika, Indonesia.

At most 23 percent of the forest in PT PAL’s concession may have been previously logged, with the remaining forest primary forest. Now, PT PAL is beginning to deforest the remaining 18,000 ha of primary forest in its concession. But Noble Group 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.

As a result, according to the Financial Times, Noble Group’s creditor HSBC has pushed for an investigation into Noble’s  environmental practices. The RSPO has ordered Noble to halt further development of its palm oil holdings.

Financial Details

On September 30, 2014, COFCO Corporation, subsidiary COFCO Agri Limited (CAL Group), and an investment group that included Hopu Investment, Temasek, IFC and Standard Chartered Bank, purchased a 51 percent controlling interest in Noble Agri Limited for USD 1.5 billion.

December 23, 2015, COFCO and its associated investment consortium purchased the remaining 49 percent controlling interest in Noble Agri Limited for USD 750 million. CAL Group received 1,509,937,328 ordinary Noble Group shares for its USD 750 million purchase plus deferred consideration subject to certain adjustments and a cap of USD 200 million. As of December 31, 2016, due to uncertainty surrounding the deferred consideration, Noble Group has estimated a nil valuation for the deferred consideration. This thus removes the deferred consideration as a debit from Noble Group’s balance sheet.

As part of the sale of Noble Agri Limited 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, assuming a buyer could be found for these potentially encumbered assets. This means that COFCO has a financial interest in Noble Group selling their palm oil assets because COFCO would receive the proceeds, up to the deferred consideration cap of USD 200 million, while returning the promissory note.

But Noble Group states on p. 146 of their Noble Group Annual report 2016:

As at 31 December 2016, due to uncertainty surrounding the deferred consideration, the Group has estimated a nil valuation for the deferred consideration.

At the same time, Noble Group states on p. 149 of their Noble Group Annual report 2016:

CAL (Group) assets in subsidiaries classified as held for sale USD 228,257,000

Noble Group states in its 2016 Annual Report that its palm oil plantations are “held for sale (at) USD 228,257,000,” while “the Group has estimated a nil valuation for the deferred consideration” less the promissory note USD 64,449,000 proceeds to a corporate buyer, does Noble Group realize the remaining USD 163,808,000 as revenue or does all of this remaining revenue revert instead to CAL Group? This is unclear.

Noble’s creditors are also reviewing their environmental policies resulting in further material impacts. HSBC Revised Agricultural Commodities Policy: Palm Oil policy states:

HSBC does not and will not knowingly provide financial services which directly support palm oil companies which do not comply with our policy. We will always investigate credible evidence that companies may not comply with our policies, but we are not aware of any current instances where customers are alleged to be operating outside our policy and where we have not taken, or are not taking, appropriate action.

On July 10, 2017, The Financial Times reported that HSBC has now pushed for an investigation by the Roundtable on Sustainable Palm Oil (RSPO) into Noble Group over allegations that Noble planned to clear-cut an 18,000 hectare rainforest in Papua, Indonesia.

Furthermore, as reported by Chain Reaction Research June 7, 2017, environmental groups filed a complaint against Noble Group’s environmental assessor, who alleged that there were no primary forests on this same plantation that Noble had slated for clearcut. The Financial Times stated:

In April, the RSPO ordered another company to stop work on developing areas assessed by the same firm, noting in a letter that it found its reports “to be of poor quality”. “Given the seriousness of the allegations and supporting documentation the RSPO has advised [Noble Plantations] to stop all further development on the concession pending full independent investigations and assessment by RSPO and possible referral to its complaints panel,” it said.

The Financial Times reported that Noble declined to comment. Noble Group’s 2016 Annual Report stated on p. 17:

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.

The Environmental Investigation Agency (EIA UK) stated July 11, 2017 via private correspondence:

Noble’s environmental assessors appear to have misclassified primary forest as secondary forest, and in doing sko illegitimately opened up over 20,000 hectares of primary forest to development under RSPO rules. This act potentially dressed a liability up as an asset, but the fraud is being outed. Financiers, investors, and major customers alike no longer allow the RSPO to look the other way when members file fraudulent or deficient environmental assessments, and the truth will come out. Noble must now disclose the material risks of impairment of its palm assets as its developable area is significantly reduced to meet basic sustainability policies of its stakeholders, financiers, investors, and major customers.

Investor Summary

Regardless of how Noble’s RSPO complaint is resolved, global banks such as HSBC are clearly actively applying their environmental policies within their overall credit and risk management approaches to mitigate financial risks related to deforestation and human rights issues. Investors need to be wary of deforestation risks as at times these risk may be material to investors’ valuations.

It is becoming important for investors to track and review RSPO actions as the the RSPO has become the standard backbone of many banks’ environmental policies. In this case, RSPO has advised Noble to halt any further development of its palm oil operations until further notice given their creditor HSBC environmental policies.