Noble Group Case Study Solution - Why Does Noble Group Perform the Activities It Performs?

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Working capital requirements fluctuate strongly with (1) Volume of commodity shipments (2) Level of commodity prices. During periods of rising commodity prices, there is a risk that funding commitments in place will not be sufficient total working capital needs.

Further, the working capital challenges for the industry include deciding on the balance between lean manufacturing and supply chains, lead times and inventory and service levels.

How do commodities traders finance their operations and manage risk?

Commodity traders manage their risk by the below measures

- Since the main source of risk was the price or market risk, since the commodity prices were highly volatile, it hedged its price risk by using futures markets. Nobel maintained a high level of hedged risk with over 90% of inventory stock either priced hedged or pre-sold

- Nobel’s foreign currency risk is minimized since most of the international commodity trading was denominated in USD

- Nobel minimized its counterparty risk by doing its due diligence on potential suppliers and customers, analyzing their credit risk profiles, and seeking mitigants like letters of credit

- Nobel managed its political and environmental risk by buying blanket insurance coverage policies

- Further CTFs can reduce risks by

- Diversification: They can avoid the risks by trading in multiple commodity markets

- Integration: Owning assets across value chains provides opportunities to self-hedge.

Commodity traders need active working capital. They finance their working capital by the below methods

- Nobel ensured a comfortable working capital through short term and long term financing capacity. It relied more than its commercial banking relationships to access lines of credit.

- Suppliers were also a source of financing. It was an attractive option since it was available at a cheaper cost and its amounts were excluded from most leverage metrics

- Discount its receivables or sell its receivables to financial institutions for cash

- Arrangement of pre-purchase financing to its suppliers

- Pre-payment soya repurchase program

However, it is to be noted that Nobel’s working capital needs were raising due to rising commodity prices which demanded its decision to make capital investments as part of its asset medium strategy

Should Noble issue $500 million of 8.5% senior notes in May of 2008?

This route may not be a cheap route. The proposed 8.5% rate was substantially higher margin over treasuries which Nobel had issued. . This cost is also higher than the current cost of bank debt. Further, this is loosing popularity in Asia. Further, it increases debt, interest payments and dilutes shareholder’s value.

So issuing $500 million of 8.5% senior notes is not the viable option to be selected. The best option would be to raise capital as it provides no dilution of shareholder’s value

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