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Re: The Nightmare is coming to an end.............
Speaking of nightmares, Mike, is there one here . . .
Glencore's equity offering at 125p less than two weeks ago on September 16, are already down a whopping 43%
GLEN Credit Default Swap were pushing on 600 bps
From Goldman:
Glencore’s trading business relies heavily on short-term credit to finance commodity deals and its financing costs would increase if it were to lose its Investment Grade credit rating. In addition, it could even lose some counterparties due to increased counterparty risk.
Glencore is not just a miner, but probably the world's largest commodity trading desk, and is a key commodity counterparty for everyone
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Re: The Nightmare is coming to an end.............
One of Glencore’s larger shareholders has uttered the L-word.
Legal & General’s CEO, Nigel Wilson, told Bloomberg TV this morning that Glencore has reached a “quasi-Lehman moment”, where speculation over its viability is fuelling the crisis gripping the company.
Wilson argued that Glencore’s managements need to respond to claims that its shares could become worthless unless commodity prices recover.
More here: Glencore Must Stem Rumors, Stop Lehman-Like Moment, L&G Says
“There’s a lot of noise and there’s not enough signalling.”
“That lack of information causes a huge amount of uncertainty at Glencore, which is having a massive contagion effect across the world.”
Glencore’s woes have certainly contributed to the nervousness in the markets this week. But that’s not just based on a lack of information. It’s basically because Glencore holds $30bn of net debt, twice its market capitalisation(!), in an environment where iron ore, copper, coal and oil prices are all weak.....
As Glencore Is Compared to the Fall of Lehman, It Shows Up in 529 College Plans
By Pam Martens and Russ Martens: September 29, 2015
Stocks were variously spiking and tanking from moment to moment in early morning trade and much of the problem resides in one eight letter word – Glencore. The Switzerland-based industrial metals producer and commodity trading firm has lost over 75 percent of its share value this year, dumping 29 percent of that just yesterday. Two of the major credit ratings agencies, Moody’s and Standard & Poor’s, have stated they may downgrade the debt of the company. Credit markets have effectively made those rating outlooks moot and already started trading the debt as junk. The Lehman Brothers’ analogy is being made by market pundits.
Glencore’s Lomas Bayas Copper Mine in Chile
As if all of this weren’t causing enough market angst, yesterday UK investment firm Investec issued a research report on Glencore, suggesting that shareholders could be wiped out if low raw material prices persist. The report stated: “In effect, debt becomes 100% of enterprise value and the company is solely working to repay debt obligations.”
The market has watched the cost of buying Credit Default Swaps (CDS) on Glencore debt jump dramatically and the added worry is just which financial institutions are on the hook to pay on those bets. That same kind of opacity persisted during the Lehman debacle, leading to credit markets seizing up.
Against this backdrop, the last place one would expect to find shares of Glencore is in college savings plans known as 529 plans. But according to a report from Morningstar, as of June 30, 2015, six VA CollegeAmerica 529 funds were holding a total of 179 million shares of the American Depository Receipts (ADRs) of Glencore (symbol: GLCNF).
While the stakes represent a small percentage of the total assets in each fund, one has to wonder why the shares were not sold as the stock went into a nosedive beginning in December of last year.
Mutual funds report their portfolio holdings on a delayed basis so the 529 plans may have since sold their shares. But as of June 30, 2015, Morningstar reports that 179 million shares were still in the portfolios and that one of the 529 plans, the VA CollegeAmerica EuroPacific Growth Fund had increased its stake by 47.56 percent.
CollegeAmerica is managed by the well known mutual funds company, American Funds. Its web site says it “launched in 2002,” is the “nation’s largest 529 plan,” manages assets “topping $45 billion” and has been chosen by “1 million families nationwide.”
Recalling the research conflicts that got Citigroup’s Jack Grubman barred from the industry for life, Citigroup has been hired as an advisor to Glencore and is also issuing a buy rating on the stock.
Tragically, nothing ever seems to materially improve on Wall Street – even after the greatest financial collapse since the Great Depression.
Last edited by don; September 29, 2015, 12:05 PM.Comment
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Re: The Nightmare is coming to an end.............
The sudden collapse of credit lines is what brought down the entire merchant energy trading business in the aftermath of Enron. That included Dynegy Inc., the #2 player at the time. About the only energy traders that survived more or less intact were the internal divisions of the major multinational oil companies such as BP, Exxon, Shell, etc.Originally posted by don View Post
Commodity traders always depend on large credit lines, some of which are supplied by hedge funds and the large Wall St and London investment banks (and now the state owned Chinese banks fund the state owned Chinese commodity traders). If there is another credit seize up like we saw in merchant energy in 2001 and in asset backed commercial paper circa August 2007, most of the global trading houses that are not affiliated with upstream producers or affiliated with an investment bank (Morgan, Goldman, etc) will be at risk.Comment
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Re: The Nightmare is coming to an end.............
Bank of America has done an extensive analytic breakdown of Glencore's true gross exposure.
We consider different approaches to Glencore’s debt. Credit agencies, such as S&P, start with “normal” net debt, i.e. gross debt less cash and then deduct some share (80% in the case of S&P of “RMIs” – Readily Marketable Inventories. These are considered to be “cash like” inventories (working capital) in the marketing business. At the last results, RMIs were about US$17.7 bn. Giving full credit for RMIs plus a pro-forma for the equity raise and interim dividend we derive a “Glencore Adjusted Net Debt” of c. US$28 bn.
On the other hand, from discussions with our banks team, we believe the banks industry (and ultimately regulators) may look at the number i.e. gross lines available (even if undrawn) + letters of credit with no credit for inventories held. On this basis, we estimate gross exposure (bonds, revolver, secured lending, letters of credit) at c. $100 bn. With bonds at around $36 bn, this would still leave $64 bn to the banks’ account (assuming they don’t own bonds).
BofA details:
Over US$100bn in estimated gross exposures to Glencore
We estimate the financial system's exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group's strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus.
Debt broadly spread
GLEN debt breaks down as US$35bn in bonds, US$9bn in bank borrowings, US$8bn in available drawings and US$1bn in secured borrowing. We then estimate that the group has US$50bn in committed lines against which it can draw letters of credit with which to finance its trading inventories. Based on public filings, we believe that the banks may have limited capacity to reduce even the undrawn portion of these lines until 2017. GLEN have publicly stated its financing is largely locked in - but we believe that this may not provide comfort to risk-averse bank shareholders and supervisors.
Concentration and convexity: potential stress testing ahead
GLEN had an unencumbered asset base of over US$90bn in property, plant, equipment and inventories at the half year. However, for bank investors and regulators, after the crisis, gross nominal exposure is a key metric – including committed facilities. We believe many banks may now be more carefully reviewing their exposure to the commodities complex. Glencore’s banks span the globe, with 60 in a recent financing. Glencore has stated it has locked its financing in for an extended period, but a desire to hedge would be powerful at the banks, as likely that regulators will include commodity and energy exposures in the next stress tests as it is a stated area of focus. These stress tests typically take gross exposures and assume elevated loss-given-default - a potential 5x capital uplift. A system positioned one-way on a credit has historically tended to keep spreads high; implying rising debt costs which are likely to put pressure on credit quality: convexity is alive and well.
Bond market spreads imply a non-investment grade rating
The group's bond spreads imply a rating in the single-B range and a rollover cost of funding >200bp above the cost of debt outstanding. We believe banks’ gross margins on their exposures are below the Glencore group’s average funding cost, with drawn financing at spreads around 50bps and undrawn lines materially below this. The cost of hedging exposure is currently over 600bps. Thus, the P&L dynamics for banks are difficult; this implies to us that banks may increase challenge the business model of commodity traders; this implies to us that banks may increase the cost of and reduce the availability of credit to commodity traders, thus challenging their business model.
Bank shareholder pressure on disclosure and exposure
We believe bank shareholders may pressure managements to reduce exposures, if not because of potential loss then at least because of likely capital consumption under stress. In our view, current disclosures by the banks are inadequate to provide clarity. It is not possible to estimate unsecured exposures, nor to understand if individual short term loans may be a part of a long-term irrevocable commitment as in the case of Glencore, based on publicly available disclosure..
For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)
BofA:
- Comparisons are being made with some financially leveraged companies during the 2008 Global Financial Crisis (GFC).
- If credit is downgraded, banks could lower their exposure to Glencore both in terms of RCFs & LCs.
- The high yield market is small and, our credit strategist thinks we might initially see temporary dislocations in a scenario in which GLEN were downgraded to junk.
- Bank stress tests could start to include commodity trader distress. This could lead to less availability and more expensive bank funding of traders.
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Re: The Nightmare is coming to an end.............
Eveing Don!
$3 trillion corporate credit crunch looms as debtors face day of reckoning, says IMF
A poisonous "triad" of global risks is pushing the world to the brink of a new financial crisis, says stark IMF report
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"Risk premia could decompress in a disorderly way causing a vicious cycle of firesales, redemptions, and more volatility" say IMF
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By Mehreen Khan
4:00PM BST 07 Oct 2015
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Governments and central banks risk tipping the world into a fresh financial crisis, the International Monetary Fund has warned, as it called time on a corporate debt binge in the developing world.
Emerging market companies have "over-borrowed" by $3 trillion in the last decade, reflecting a quadrupling of private sector debt between 2004 and 2014, found the IMF's Global Financial Stability Report.
This dangerous over-leveraging now threatens to unleash a wave of defaults that will imperil an already weak global economy, said stark findings from the IMF's twice yearly report.
The Fund warned there was no margin for error for policymakers navigating these hazardous risks.
The slightest miscalculation, they said, could collapse into a "failed normalisation" of interest rates and market conditions, wiping 3pc from the world's economic output over the next two years.
How debt levels compare in the emerging and developed world
But stretched corporate balance sheets were just one element of unprecedented "triad" of challenges facing the financial system, said the twice yearly report.
Seven years after the financial crisis, a combination of lingering debt burdens in advanced economies, and vanishing market liquidity could result in a new credit crunch when conditions tighten.
• Five charts that explain a miserable global economy right now
"Policy missteps and adverse shocks could result in prolonged global market turmoil that would ultimately stall the economic recovery," said Jose Viñals, financial counsellor at the IMF.
The world's major central banks should ensure policy remains "accommodative" for fear of setting off a new wave of instability that would see bond prices rise and asset prices collapse, said the IMF.
"Risk premia could decompress in a disorderly way causing a vicious cycle of firesales, redemptions, and more volatility," said Mr Viñals.
The report called on the Federal Reserve to hold off on its first interest rate hike in nine years and for the authorities in the eurozone and Japan to continue with unprecedented stimulus measures.
"Managing any outbreaks in financial contagion will require nimble and judicious use of available policy buffers," added the report.
The IMF painted a picture of a brittle financial system that was coming to the end of a period of cheap liquidity propped up by low rates.
These benign conditions are set to evaporate as the credit cycle tightens in emerging markets.
Flashing red: emerging markets are at the tail-end of the credit cycle
The summer's stock market volatility and unprecedented outflows from emerging markets hint at the disruption that awaits markets, said the report.
"Some markets show clear signs that liquidity conditions have worsened and that accommodative monetary policy is masking underlying risks," the report said.
"The challenge will be for abnormal market conditions to adjust smoothly to the new environment."
China's authorities will also have to put up with mass corporate bankruptcies and debt write-offs, said the IMF.
In the wake of its stock market collapse earlier this year, the report called on Beijing to embark on an "orderly deleveraging" by removing stabilisers artificially propping up its indebted companies.
"Moving decisively will ultimately prove less costly than trying to grow out of the problem."
Although governments in the developing world had taken the right policy actions to strengthen their public finances and reduce external debt, leveraged banks and corporates could now drive them into the ground, said the report.
Sovereigns could then lose their investment grade status from ratings agencies, heaping more pressure on spiralling borrowing costs.
Last month, Latin America's biggest economy, Brazil, was "junked" by Standard & Poor's rating's agency.
This cocktail of financial risks is compounded by an environment of anaemic growth. The IMF forecasts global output will fall to its lowest level in five years at just 3.1pc this year.
"Low nominal growth would put pressure on debt-laden sovereign and private balance sheets, raising credit risks," said the report.
Accommodative monetary policy is masking underlying risks
"Corporate default rates would rise, particularly in China, raising financial system strains, with implications for growth.
"Some markets show clear signs that liquidity conditions have worsened and that accommodative monetary policy is masking underlying risks."
In a bid to manage the transition, the IMF urged authorities to play closer attention to the asset management industry and beef up capital requirements for emerging market banks.
In Europe, EMU authorities should press ahead with their plans for a banking union to plug the architectural gaps that have undermined the future of the single currency.
"What we want to achieve is a successful normalization of financial conditions and monetary policies together with a sustained economic recovery", said Mr Viñals.
"Three percent of global output is at stake".Comment
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