Noble Group

Founded by former metal dealer Richard Elman, the Hong Kong-based, Singapore-listed commodities trading firm, Noble Group, has long been a favourite of fund managers. So far, It has been has been able to raise equity with very little problem. But to maintain the company’s rocketing growth, new funding sources are being added to its traditional use of commodity-based transactional financing, says former Goldman Sachs banker and Global CFO Steve Marzo.

What's your borrowing strategy for this year?

Marzo: As of the third quarter 2003 our turnover and gross profits were up 48% and our net profits were up 40% year-on-year. (Full year results will be out on February 18). Partly this was thanks to incredible demand for raw materials from the emerging economies of China and India. This exceptional growth means we've had to develop a significant level of banking lines, now numbering 35. Interestingly, we're beginning to see a group of global banks emerge as our top tier bank group, due to their global reach and understanding of our business.

What’s your overall level of indebtedness?

If you look at our net debt position, it is essentially zero as our bank debt can be easily and quickly repaid by liquidating our receivables and our raw materials inventories. As a result these assets are quasi-cash. Specifically, in respect of our receivables, these represent either investment grade clients or investment-grade institutions, which have issued the L/Cs on behalf of our clients. In both instances we can easily discount the receivables with our banks. In addition, our inventories are readily convertible to cash because of their commodity characteristics, widely available markets, and international pricing and hedging mechanisms.

You’ve relied heavily on equity financing in the past. But do you plan to diversity your funding with debt instruments?

Well, we carried out two successful share placements last year, and our share capital has also increased substantially due to our continuing strong profitability. In addition, our need for external bank financing has been reduced due to supplier financing, a source we expect to grow further in 2004.  As for diversifying our debt funding, we'll consider various debt capital market instruments in order to achieve greater financing flexibility. Given that our market cap on the Singapore exchange is just north of $1 billion and our adjusted net debt level is essentially zero, we believe the capacity  exists to increase our debt levels. However, due to our improved financial strength and conservative approach to funding we don’t see raising debt is an urgent need. We're considering getting a credit rating from the rating agencies, but have no specific timetable.

What might the proceeds of a bond be used for?

In order to enhance our trading flexibility, we're considering acquisitions of equity stakes in key suppliers and sectors. We are moving downstream, down the sourcing chain, in order to increase access to long-term raw material supplies. In recent months, for example, we’ve announced several stakes in mining companies in Australia. This reflects our evolution from an “asset light” balance sheet philosophy to one focused on investment in strategically important businesses.  

Does that imply an eventual reduction in bank financing in favour of bond financing?

Not necessarily. One of our major competitive advantages when we go into new markets is our ability to finance our businesses as well as offer structured finance options to our clients. We want to continue to work with our commodity banks - they're very important partners. However, access to long-term financing would be helpful to finance our long-term investments.

Does a commodities trading firm have an unusual capital structure in any way?

Normally, commodity trading companies are highly leveraged given their thin profit margins, which require high turnover to generate satisfactory profitability. The high turnover thus requires a significant level of bank debt, which is often financed on a transaction basis with banks. Historically, we've relied extensively on transaction financing and will continue to do so as it usually represents a competitive financing cost. However, given that our revenue has doubled over the past two years banks are increasingly willing to lend to us based on our overall financial balance sheet strength and  profitability. This will provide us with additional flexibility, but clearly we need both kinds of lenders.

Given that you trade in some pretty remote locations, how do you choose your banking partner? Do you believe global banks really have the capacity to serve you effectively in places like the Ivory Coast, or do you end up utilizing local banks?

Quite often smaller, less well known markets have only a few banks which serve commodity type businesses like ours. We appreciate banks which serve these niche markets and can also assist us on a global basis as well. We believe our banks possess specific skills and we try to work with banks that match our needs and theirs. So far it’s worked well.

China is assuming an increasingly important position as a consumer of raw materials.

Why are you listed in Singapore, given many investors believe Hong Kong is the back door to China?

We're very satisfied with our experience in Singapore. We believe the Singapore Stock Exchange possesses a high degree of professionalism and a rigorous approach to corporate governance.  And while China is important to us, don’t forget we are a global firm. So a Hong Kong listing is by no means a necessity for us to attract investors in respect of our PRC business.   

Some bankers have complained of cases where Chinese banks find discrepancies in documentation to help their corporate customers avoid payment to suppliers during times when commodity prices have swung against them. Have you had similar experiences?

These incidents can occur all over the world, not just China. Fortunately, the Noble experience in China is terrific owing to our long-standing relationship with clients. This strong relationship lessens the likelihood of defaults. In addition, our banks know the China market well, and that  also assists us in managing our business.

It looks like we are entering an era of rising interest rates. How will that affect your cost of funding?

That’s probably true, but I don’t think we see a sudden or significant rise in US rates. While we normally fund at the short of the curve we continuously watch forward rates and will consider hedging our rate exposure as necessary.