Yesterday NMC issued the latest in a series of confusing disclosures about its controlling shareholders’ ownership and pledges when it disclosed that 19.0 million of its shares are potentially subject to undisclosed share pledges. We note that the FCA has announced it is probing these misstatements. In our December 2019 report, we stated that we suspect NMC has undisclosed debt. These recent disclosures and insider share sales reinforce our view.
The numerous pledges as raise at least two possibilities, each of which is worrying. One possibility is that NMC has undisclosed debt secured by share pledges. The Financial Times December 20, 2019 report on NMC’s attempted off-balance sheet debt financing hints at hidden debt secured by share pledges. Another possibility is that these pledges were collateral for loans to related parties that transacted with NMC on non-economic terms, thereby subsidizing NMC’s margins, which we called “too good to be true”. Such debt could have been taken on by either disclosed or undisclosed related parties (such as Modular Concepts, which we highlighted in our previous report). In this report, we reveal details about additional previously undisclosed related parties that appear to transact with NMC.
In either scenario, debt would have effectively been used to pump up the value of stock, which would have in turn been used as collateral for (likely increasing) debt. To the extent our suspicions turn out to be correct, this circular symbiosis would be reminiscent of Enron’s off-balance sheet debt structures in which Enron issued shares to “special purpose entities”, which borrowed money using the stock as collateral, and then bought (poor) assets from Enron. As with Enron, this circular arrangement would work until the stock value falls, which is what ultimately triggered Enron’s collapse.
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