By Mak Yuen Teen
On Monday, 27 August 2018, Noble Group shareholders will vote on the proposed restructuring while “independent shareholders” will also vote on a second whitewash resolution at Noble Group’s Special General Meeting (SGM). The whitewash resolution is required for independent shareholders to waive their right to receive a mandatory general offer from the senior creditors’ group, who will own 70% of New Noble shares if the the restructuring is approved, resulting in a change of control. For this resolution, shareholders who are part of the the “Senior Creditor Concert Party Group” and “parties not independent of the Senior Creditor Concert Party Group” are not allowed to vote.
Separately, senior creditors and perpetual capital securities (perp) holders will have to approve their own schemes/resolutions. For the senior creditors, approval means a majority in number representing 75% of the value for each class of existing senior creditors voting in person or by proxy at scheme meetings that are convened. For the perps, 75% of the votes cast must approve an extraordinary resolution at a duly convened meeting.
It would appear that Noble is nearly there as far as the primary restructuring to be approved by shareholders is concerned; already there as far as the senior creditors are concerned; and not quite there as far as the perp holders are concerned.
Let’s first look at the vote by shareholders coming up. Noble said that it has already secured irrevocable undertakings from shareholders owning 30.4% . While this still looks some way from the majority (50% plus 1 share) needed, not all the shares will be voted. If we look at the last AGM held on 28 April 2017, and take the resolution with the most number of shares voted, 63.55% of the shares were voted. If we assume that a similar number of shares will be voted at the SGM, the 30.4% translates to 47.84% of the votes – very close to the majority. Of course, it is possible that the shares voted for this day of reckoning will be higher.
This shows how important it was for Noble to get its former arch enemy Goldilocks on its side as Goldilocks held 8.1% of the shares. It of course raises questions as to whether Noble promised the sun and the moon to Goldilocks – and also to the senior creditors who have joined the party in a big way – which the company and other stakeholders will pay for down the road. While I am not saying that any deals agreed will be harmful, Noble was in my view in a rather poor negotiation position – getting Goldilocks on board not only got them closer to the finish line for the shareholders vote, but also ended the lawsuits launched by Goldilocks which could have torpedoed the restructuring. [One thing I should point out is that 1.35% of treasury shares which were held by the company as at 28 February 2017 have now been sold by the company, resulting in an increase in number of issued shares. There are no more treasury shares. I do not know who bought those treasury shares and whether they will vote for the resolutions].
Hence, it looks like Noble is nearly there when it comes to shareholders. Without Goldilocks, I believe there would have been a fair chance that the vote would not have passed. After all, while shareholders will get 20% of New Noble, senior creditors will own 70% and management will own 10%. There will also be US$1.675 billion in bonds, US$25 million in perps, and US$200 million in preference shares (which shareholders will indirectly own a tiny piece of, since New Noble will own 10% of the preference shares). To be fair, senior creditors do have first claims so it is neither surprising nor unfair that they get much more out of the restructuring. But shareholders who have seen the market cap of the company falling by 99% would be very angry shareholders, and they could well have taken a “let’s die together” view of things and voted against the restructuring even if had meant liquidation of the company.
Let’s consider the senior creditors. Noble said that an aggregate of 86% of Existing Note Creditors and Existing Revolving Credit Facility (RCF) Lenders have given their irrevocable undertakings. It needs a majority in number and 75% in value for each scheme, so it looks like it is already there as far as the senior creditors go. In exchange for the US$3.45 billion in claims, senior creditors will get US$1.645 billion in bonds (or 49.3% of the existing claims), 90% of US$200 million in preference shares, and 70% of the shares in New Noble.
As for the perp holders, Noble said that it has already received irrevocable undertakings for those representing 42.9% of the value of these securities. Perp holders will see US$400 million in securities with a 6% distribution rate replaced by US$25 million with a 2.5% non-accumulative distribution rate – they will only get a distribution if dividends are paid to ordinary shareholders. Many perp holders may be unhappy with the prospect of such a deep haircut and it is possible that we may yet see a revolt.
Even if all the schemes and resolutions are passed, the future looks very uncertain for New Noble. First, while a new 10-member board will be constituted, with five being independent directors, there remains concerns. It is good that a global search will be undertaken for the five new independent directors to be appointed (and this is a bona fide global search undertaken by a top tier search firm, not some of the other “global searches” we have seen bandied around here). However, one wonders whether there will be many interested takers given the situation that the company is in.
I have repeatedly questioned the composition of the board and how independent directors were appointed and can only wonder and lament – why did it have to take for the company to be near-death before it realised that it had to change its ways? I am also concerned that the current CEO will remain in place, together with the current CFO, as executive directors of New Noble. The former management were used to running something like a casino with commensurate risk-return payoffs and now they have to run a highly disciplined operation. They may be truly mediocre at it even if they are paid more than a million dollars.
It is good that Richard Elman has now decided not to take up the third executive director position, but he has been out and in and out and in before, so one does wonder if this is out for good, or just out until after the restructuring is approved.
Even though the creditors will only nominate one director (with Goldilocks also having one nominee), ultimately, the directors, including the independent directors, will be appointed by the senior creditors since they will own 70% of the New Noble shares. The interests of shareholders and creditors may not necessarily be aligned and the creditors will be wearing the hats of both creditors and shareholders. In fact, the reason for having the US$200 million preference shares in the capital structure of New Noble and having the senior creditors take 90% of these is to incentivise them to not think and act only like creditors.
This leads me to the second concern. New Noble looks to me like a fragile alliance among various stakeholders with different interests, with various incentives built in to try to motivate the right behaviour in the interests of all concerned (such as the preference shares and the various incentives for management). Of course, in a normal company, there are also various stakeholders whose interests have to be managed and balanced – but New Noble is no normal company. Whether those incentives work to keep the alliance going remain to be seen.
Third, coming back to my earlier point, we do not fully know what deals have been cut to avoid the nuclear option of liquidation. A high price may yet have to be paid – and it may turn out to be just delaying the inevitable.
Fourth, there is still the possibility of litigation although while we cannot rule this out, the fact that Goldilocks has ceased its actions makes it less likely now.
There are many lessons to be learned from this saga. In a future article, I will discuss some of these lessons, particularly for investors and regulators.
