Glencore’s shares have staged a bounceback almost as powerful as Monday's collapse. But don’t go thinking the mining and commodities trading giant is out of the mire. Far from it.
First, the share price remains utterly bombed out on its levels, even from last week; but, perhaps more importantly, the market’s scepticism about its ability to service its vast, $30bn debt pile only got worse.
The clearest measure of how financiers view a company’s creditworthiness minute by minute is through what are known as credit default swaps, or CDSs. These are financial products that insure lenders against a company or nation defaulting on its debts. Like any insurance policy, the more risky the prospect of a claim, the higher the premium. If the premiums on your debt get too high, lenders stop lending and you go bust. Fast.
The CDS market is also a way for traders to bet on your collapse. Cruel, but hey that’s capitalism. So, when HBOS was in the mire in September 2008, its CDS price, known as a spread, shot up 200 basis points to 512, meaning it would have cost $512,000 to insure $10m of the crippled bank’s five-year debt. Not long after, despite its protestations that all was well, HBOS collapsed into the arms of Lloyds.
On Tuesday, even as Glencore’s share price was bouncing upwards (it ended the day up 11.63p at 80.25p), the company’s CDS spreads rocketed from 552 on Monday morning to nearly 900. The trades were few in number, true, but the spread was bigger, even, than at RBS in the height of the 2011 eurozone debt crisis.
One CDS expert, asked if he had ever seen anything like this in a major business, was far from reassuring: “Sure, I’ve seen it, but only in companies who’ve gone bust.”
For some in the market, this CDS savaging shows Glencore’s game is up. Certainly, if HBOS and RBS are anything to go by, they could be right.
Glencore bulls – and there are still plenty of them – say there’s no comparison with those stricken financial giants. Unlike an over-leveraged bank needing constant debt rollovers, Glencore doesn’t need new borrowings right now, they say. Indeed, in a lunchtime statement that helped push the rally, Glencore stressed it was “operationally robust” and “retains strong lines of credit and access to funding”.
Besides, Glencore’s fans say, it has real assets – mines, smelters – that can be sold for serious money if it needs to pay creditors in a hurry.
In the financial crisis, the Glencore bulls say, banks stuffed with rubbish mortgages and commercial loans didn’t have that luxury.
But the differences between HBOS, RBS and Glencore may not actually be that great. Nobody wanted to buy banks’ assets back in the crisis years for fear those loans would fall further in value. In these markets, who’s to say the same might not happen to Glencore’s mines?
Then there’s the question of Glencore’s large commodities trading operation. To some eyes, it behaves remarkably like a bank. It takes debt-funded positions – requiring a strong balance sheet – just as a City finance house does.
Glencore says its trades are all hedged and its balance sheet can cope. But there are niggling doubts in the market about what’s really going on in the trading arm. Like the sliced and diced securities products that snarled up the banking system during the financial crisis, commodities trading is inherently opaque. If you’re on the outside and think you know the tricks of the trade, you’re wrong. Doubters fear what one credit specialist described as “the unknown unknowns”.
And there’s another worry, this time based on a key difference between the big banks and Glencore. Behind the megabanks was safety for investors in the knowledge that the banks were so crucial for running the economy that countries would bail them out if necessary. That, along with those bailouts, eventually gave creditors the confidence to keep them alive.
Is Glencore systemically important? Will the Treasury, the Swiss National Bank, or the Federal Reserve step in to support its millionaire traders? Hardly. Governments around the world may buy their countries’ mines back, but that’s as far as it goes.
On Tuesday, analysts at the investment bank Citigroup declared Glencore’s shares were so undervalued that its chief executive, Ivan Glasenberg, should take it private. With its shares now worth only around £12bn, the company is potentially affordable for Mr Glasenberg and his management team, with a bit of help from their friends. But the state of the company’s debts – indicated by its CDS blowout – make a management buyout less simple than it looks.
Why? Because for the lenders who’ve stumped up $30bn to the company, Glencore as a private company is a riskier proposition than it is on the stock market, where it has relatively easy access to the world’s investors.
As one corporate restructuring expert explains: “If management were to try and take it private, the lenders will say: there is a price for that – either pay down some of your debt or compensate us for the increased risk.”
Alternatively, if Glencore’s financial situation continues to deteriorate – and we’re not there yet – lenders may seek to swap some of their loans for shares in the company. Such a move would further wipe out existing shareholders.
The alternative outcome, which Glencore clearly hopes for, is that it can ride out the current collapse in commodities prices and watch its shares soar as demand picks up again.
And that’s where the human element to the story comes in. Mr Glasenberg and his team have built up huge reputations through their Glencore empire over the years. Nothing would give them greater pleasure than to hold their nerve and boast of their foresight in two years when the shares have rocketed back. Slinking back into the shadows of private ownership just isn’t their style.
The problem is, nobody knows when, if, or by how much, demand for Glencore’s products will return.
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