Muddy Waters Shorts Noble Group on Accounting Issues

Posted by Joseph Keefe April 9, 2015

Noble's stock falls to 1-1/2 year-low, bonds drop.

Noble Group came under heightened scrutiny on Thursday after U.S. based Muddy Waters unveiled a short position in the Singapore-listed company, which is already under fire from an anonymous research outfit for its accounting policies.

Shares in Noble, one of Asia's biggest commodity traders, tumbled as much as 9.3 percent to their lowest since September 2013 in heavy trade, and its bonds fell immediately after the report from investment research firm Muddy Waters.

"Noble seems to exist solely to borrow and burn cash," Muddy Waters said in a report titled "Noble's accounting: Fueling the cash-burning fires". It did not give details of its short position.

The latest attack throws the spotlight on Noble's governance and disclosure practices and raises a question about its long-term future as an independent company. It also highlights the wide leeway available to commodity companies in making accounting assumptions.

Noble rejected the allegations and said it was studying the report in detail.

Thursday's stock losses have wiped out nearly a third, or as much as S$2.56 billion ($1.89 billion), from Noble's market value since mid-Feb when little-known Iceberg Research accused the company of inflating asset values by billions of dollars through aggressive accounting.

While rejecting the claims, Noble has linked Iceberg to an employee it fired in 2013, and started legal action in Hong Kong.

Noble is one of the largest Asian companies ever to be targeted by a slew of negative reports from independent researchers that question its financials.

"Noble will have to really re-look their IR strategy, their governance strategy, and it has to assure investors. That's the most fundamental and basic thing they have to do now," said Roger Tan, chief executive of Voyage Research. "All hands on deck for the defense."

But Noble needs to strike a balance between being transparent and giving away its strategies to rivals, particularly in a competitive business like commodities trading, some analysts say.

QUARTERLY LOSS

Pressure has also mounted on Noble after it unexpectedly reported its first quarterly loss in three years last month, and the slump in its share price has raised the prospect of a possible takeover, bankers have told Reuters.

Muddy Waters is the best known member of a group of short-selling investors and financial bloggers who have exposed fraudulent accounting practices among China-based companies with U.S. or Canadian stock listings.

Muddy Waters said it was acting independently from Iceberg.

"The firm leveling the criticism, Iceberg Research, has had no involvement in, or advance knowledge of, this report. By the same token, Muddy Waters has had no involvement in, or advance knowledge of, its reports," Muddy Waters said.

Noble is the second Singapore-listed company attacked by Muddy Waters, which went short on Olam International in late 2012, prompting state investor Temasek to take majority control.

Muddy Waters hired a firm called Qverity to analyse Noble's management and said behavioral analysis by the company supported Muddy Water's opinion of Noble's management.

Qverity is founded by former United States Central Intelligence Agency experts in detecting deceptive behaviour.

Debt markets are already punishing Noble's debt, with its bonds trading at spreads wider than those of competitors such as Olam. S&P, Moody's (MCO) and Fitch have Noble's credit rating at the lowest investment grade level.

"We are reviewing the 2014 numbers as we normally do and will make an announcement when we conclude the review. The parameters discussed in the report are a matter of routine checks for us," said Kalai Pillay of Fitch Ratings.