National Post




When Swiss commodity trader André & Cie went bust 17 years ago, Richard Elman pounced. He bought its Asian grains business for next to nothing as part of an acquisitio­n spree that would make his own fledgling company, Noble Group Ltd., into Asia’s biggest commodity trader within a decade.

Elman, 77, has watched another global commodity- trading powerhouse collapse before his eyes over the past year: his own.

As spectacula­rly as Noble grew under Elman’s leadership into a company bankers once dubbed a “mini- Glencore,” its dizzying downfall was just as staggering. Like André & Cie, debts became untenable and trading losses mounted as Noble was dogged by allegation­s that it deceived investors with accounting tricks. Now with more than US$ 1 billion of debt coming due in the next few months and no way to pay, Noble agreed to hand over the company to creditors in a restructur­ing deal that will virtually wipe out its shareholde­rs, leaving Elman with a mere 1.8 per cent stake in the company he founded.

“It’s terrible for Richard: this is his child, his dream,” said JeanFranco­is Lambert, an independen­t consultant who dealt extensivel­y with Noble while heading global commodity finance at HSBC Holdings Plc from 2010 to 2015. “He put together a super company. But then it got out of hand.”

Noble’s fight for survival follows a wave of acquisitio­ns in the last decade, paid for with cheap credit, that turned the business Elman started in 1980s Hong Kong as a small middleman supplying Chinese steel makers into a conglomera­te operating assets the world over: coal mines in Australia, sugar mills in Brazil, American fuel terminals.

Elman named his company after James Clavell’s 1981 novel Noble House, a fictional tale of a colossal trading house in 1960s Hong Kong. Elman’s attempt to construct a real- life empire on borrowed cash ultimately unravelled.

The Singapore- listed trader was scrutinize­d for booking income on future contracts at unrealisti­c prices. Combined with a number of poor trading calls, Noble spiralled downwards. Once surpassing US$ 10 billion, its market value dropped to just US$ 263 million on Monday before shareholde­rs learned their stake in the company would be diluted to 10 per cent.

“Everybody was looking at Noble becoming the new Glencore. I didn’t like it,” recounts Lambert, referring to the US$ 84 billion Swiss commodity giant. Rather than “building the culture gradually and then move to other businesses,” he says Noble expanded too quickly into new businesses, specifical­ly energy.

The story of how Elman, a British high school dropout, climbed to the top of the commodity trade started at the bottom rung. At 15, he laboured at a scrap- metals yard in Newcastle. He was running the yard soon after, honing skills in buying and selling metals that eventually took him to San Francisco, then Japan. In the early 1970s, Elman founded Metal Ore Asia in Hong Kong and sold it to his next employer, Philipp Brothers, at the time a global commoditie­s giant.

While heading Phibro’s Hong Kong operations, Elman sensed Asia was on the cusp of a major turnaround and plowed US$ 100,000 of his savings into opening Noble Group in 1986 to prepare. His instincts were right: Chinese growth averaged 10 per cent annually for two decades and, by 1995, Noble supplied over a quarter of the nation’s chrome imports.

“We could see the demand that was going to explode as China and India developed,” Elman said in Noble’s 2016 annual report, recounting how he’d grown “accustomed to friends patiently listening to my dreams for Noble while rolling their eyes.”

Ignoring skeptics, Noble’s intrepid protagonis­t devised a strategy to turn his nimble trading firm into a global behemoth operating assets on six continents. He bought a coal business from Phibro in 1996 and the following year Noble was listed on the Singapore Exchange. By 2005, with the André & Cie acquisitio­n under his belt, Elman boasted that Noble was handling a quarter of global coffee supplies, half of Russia’s cocoa imports and five per cent of the world’s thermal coal.

Often sporting an open shirt with a chunky Chinese bead bracelet dangling from his arm, Elman was a real-life equivalent of the trading moguls described in Clavell’s rollicking 1,300-page fiction. He wrote folksy letters to shareholde­rs in Noble’s annual reports, sometimes comparing himself to Warren Buffett. At one point, Elman presided over a staff of 15,000, a figure that’s since dwindled to less than 1,000.

“We are in a position to be the best in the world, and amongst the biggest,” Elman told shareholde­rs in 2010, as profit touched US$605 million from US$21 million 10 years earlier.

Elman spent US$ 2 billion in 2009-2010 snapping up assets, surpassing the prior 20 years combined. Banks and investors were happy to oblige with cheap cash. After all, S& P Global Ratings had just promoted Noble to investment- grade and China Investment Corporatio­n, Beijing’s sovereign wealth fund, bought a 15 per cent stake. Noble quadrupled net debt by 2013 to more than US$5 billion.

Then the plot Elman had carefully crafted started coming undone as subdued commodity prices, slowing Chinese growth and waning profitabil­ity made Noble’s debt burden look a lot less workable.

The tipping point was in February 2015, when an unknown analyst group called Iceberg Research published scathing critiques of Noble’s accounting, warning some earnings wouldn’t materializ­e and the trader would be short on cash to settle debts. Iceberg drew comparison­s with Enron, the American energy company that went bankrupt in 2001 after an accounting fraud.

Noble’s methods were entirely legal, even if many rivals avoid booking i ncome on forward contracts so as not to inflate the value of employees’ equity. The company dismissed Iceberg as the work of a disgruntle­d former employee and sued, only to months later write down US$1.2 billion mostly from long- term coal contracts it had booked at an excessive price.

Investors fled, and short sellers like Muddy Waters LLP turned their fire on the trader. Noble’s stock slumped 67 per cent in 2015, 45 per cent in 2016 and 87 per cent in 2017. Global ratings companies downgraded Noble’s credit deeper and deeper into junk.

As its fortunes turned, Noble desperatel­y tried to stay afloat. It sold assets, including the agricultur­e unit it built on André & Cie’s foundation­s. It convinced banks to extend US$ 3 billion in new credit in mid-2016. China Investment Corporatio­n even bought new shares and, in March 2017, Noble raised US$750 million selling junk bonds.

But within two months, Noble shocked investors again with a US$ 129 million loss from a hedging bet on coal gone wrong. Its creditors were furious, especially since rather than owning the mistake, Noble blamed it on a “dislocatio­n” between market prices for physical coal and the contracts used to insure them.

The loss of its creditors’ confidence deepened Noble’s plight. It reported losses of more than US$ 3 billion in the first nine months of 2017 as the company wrote down the value of its assets and contracts. Asset sales continued, including crown jewels like its U. S. oil trading business. But rivals understood its desperatio­n and the sales netted less than Noble had hoped. With US$ 1.5 billion in debt to repay in the first half of 2018, Elman — still sitting on the company’s board as chairman emeritus — was left with no choice than to bow to the will of Noble’s creditors.

Before Noble’s bleak denouement unfolded, Elman had struggled to hand over the reins. The company had five CEOs in seven years as he tested different successors, from Tobias Brown, a veteran in Hong Kong finance, to Yusuf Alireza, a star Goldman Sachs banker with no commoditie­s experience. Each brought a different vision — and each flopped. When Elman finally did transfer day-to-day running of Noble last year, it was to Paul Brough, a restructur­ing specialist who helped to liquidate Lehman Brothers.

Addressing shareholde­rs in Noble’s heyday, Elman described building his company as “the one experience I couldn’t be prouder of.” Unlike the fictional Noble House where main character Ian Dunross ultimately succeeds at navigating his business through turbulence, Elman won’t get to decide how the final chapter of his version plays out.


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 ?? JEROME FAVRE/ BLOOMBERG ?? Richard Elman named his company after James Clavell’s novel Noble House, a tale of a colossal trading house in 1960s Hong Kong.
JEROME FAVRE/ BLOOMBERG Richard Elman named his company after James Clavell’s novel Noble House, a tale of a colossal trading house in 1960s Hong Kong.

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