Short-seller Iceberg Research turns focus to Trafigura bond


* Brazilian bond’s book value rose despite fall in quoted price

* Trafigura says it takes conservative approach to asset valuation

* Iceberg known for analysis of Noble Group accounts

By Dmitry Zhdannikov and Julia Payne

LONDON, June 20 (Reuters) – Short-seller Iceberg Research has called on Trafigura to reveal data about a bond issued by its Brazilian port associate, asking why the book value of the security – put at $490 million by the trading house – differed from its quoted price.

Iceberg said Trafigura should perform a steep writedown on the bond and take a profit hit because the public price of the security had fallen 85-90% since it started trading in 2015.

Trafigura said it was confident in the business case behind the bond.

“Trafigura has always followed a conservative approach to the valuation of its assets,” Trafigura said.

Iceberg gained attention in 2015 for highlighting what it called aggressive accounting practices at Hong Kong-based Noble Group. Commodities trader Noble denied the allegations but subsequently saw its profits collapse and was forced to sell most of its assets.

Unlike Noble, Trafigura is not publicly traded. Banks closely monitor the performance of Trafigura’s assets as its debts stand at $33 billion and assets serve as the key metric in lenders’ debt covenants.

Trafigura said the bond represented only 5% of its non-current assets as of Sept. 30, 2018.

In a note released on Wednesday, Iceberg said it wanted Trafigura to disclose detailed information regarding the bond linked to its investments in Brazilian iron ore port Porto Sudeste.

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Trafigura co-owns the port together with United Arab Emirates investment firm Mubadala as well as 90% of the listed bond of the port, with the remaining 10% in free float.

The debt is senior to equity holders and junior to Porto Sudeste’s bank debt and is repaid through royalties derived from volumes shipped by the port.

In 2016, Trafigura had to impair its investment in the port by $250 million to the current carrying value at $42 million on its balance sheet because of repeated delays in increasing the port’s throughput – problems that continue to date.

Carrying value, or book value, is an accounting measure in which the value of an asset is based on the figures in the company’s balance sheet.

Meanwhile, the carrying value of the Porto Sudeste bond on Trafigura’s books rose from $428 million in 2015 to $490 million in March 2019 despite a drop of some 85-90% in the quoted price over the same period.

The increase in carrying value became possible because Trafigura switched in 2015 from the market valuation of the asset, known as mark-to-market, to a valuation model known as Level 3 accounting practices.

The model bases valuation on estimates of future cash-flow generation – in the case of Porto Sudeste, until 2064.

Trafigura said that because the bond’s free float was around 10% and the daily traded volume was tiny, international accounting rules required the company to determine fair value by using the Level 3 model, “instead of relying on a market price that could be lacking economic ground”.

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Iceberg said the cash-flow model was justified only when an asset was not listed or traded.

“If Trafigura sold all these debt securities, it would have to write them down in full,” said Iceberg, adding that such a writedown would have hit Trafigura’s net profits.

Trafigura’s auditor, PwC, said in the firm’s latest annual report that the estimates used in determining the fair value of the Porto Sudeste securities were significant and hence constituted a “key audit matter”.

“We were able to conclude that the significant judgements were reasonable and free from bias,” PwC said. (Reporting by Dmitry Zhdannikov and Julia Payne; Editing by Dale Hudson)



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