The "Fair-value-to-arrive equity" of Noble Group. How a trader exploits a loophole in the system.
Defined as the difference between the fair market value of business assets and its liabilities, net equity is used by financial institutions to fund a commodity trader.
Noble Group has not built net equity, has lost more than $3B in Free-cash-flows over the last 29 months.
The loophole:
The net fair value G/L gains on commodity contracts that are re-evaluated/impaired only once a year under IFRS 13- Fair Value Measurement accounts for more than 102% of Noble Group's equity.
These gains are the backbone of Noble Group's equity.
If this is the case, watch-out because only a depreciation of -19% of this net fair value g/ls would render Noble Group insolvent and precipitate the Asian trader into liquidation.
The riddle wrapped in a mystery inside the enigma.
Not only the FV on G/L can be valued improperly, Noble Group has yet to fund this "Fair-value-to-arrive equity".
"Any potential investor needs to value the commodity contracts, which are the heart of Noble’s financial manipulations.** This includes the fair value gains ($4b, not less than 102% of equity) but also importantly the future liabilities ($1.7b).**
The investor has to make sure that no off-balance commitment is hidden, etc. This is a very lengthy process.
Noble kept repeating that these contracts were correctly valued. Then 48 hours before their 2015 annual results, Noble and its auditor, EY, suddenly realized that these contracts had to be impaired by $1.1b. Oops!…"
"So are commodities contracts (assets and liabilities) correctly valued now? Of course, they are not. "
"Noble has been battling liquidity issues for months and any trader would have sold these contracts a long time ago if they were valued correctly." -Iceberg Research
