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Glencore's "Doomsday" Plan Disappoints As CDS Resumes Rise; Question Emerges: "What Happens If Company Fails"

Tyler Durden's picture




 

While the US was still sleeping on its Labor Day holiday, the global commodity world was stunned on Monday when Glencore's CEO Ivan Glasenberg - formerly a perpetual optimist in all things commodity - announced a dramatic recapitalization plan, one which would see it not only scramble to raise $10 billion in capital through an equity offering, asset sale and capex cut, but become the first major copper supplier of scale to cut production, thereby defecting from the game theoretical "race to the bottom" equilibrium, and indirectly benefiting its biggest competitors. The reason: prepare for a "doomsday" scenario for commodity prices.

Glencore's unprecedented action was in direct response to an S&P downgrade warnings from the previous week, which threatened to strip the world's biggest commodity trader of its critical investment grade, BBB rating, which would have dramatic and adverse consequences on the company's trading operations: thing an AIG-like collateral waterfall. The S&P warning is also why last week the company's CDS blew out all the way to 450 bps, the widest since the financial crisis.

 

Then, as a result of the capital raise, one which many took for admission the company would aggressively focus on lowering its net leverage to a far more reasonable for the current commodity bear market 2.0x target, Glencore's CDS tumbled by nearly a third in the past 4 days.

And then, something bad happened: the other rating agency, Moody's, agreed with us when we said that Glencore's deleveraging efforts may fall well short of the market, and put the outlook for Glencore's credit rating of Baa2, just a fraction above junk, on negative watch.

Why was the news particularly bad? Because Moody's confirmed that Glencore's doomsday scenario may not be "doom" enough. From the report:

The measures that Glencore announced on 7 September 2015 will help strengthen and stabilise Glencore's credit profile when completed, however their scale reflects not just the challenges of the current commodity market, but also the growing possibility of a prolonged weaker pricing environment. On 28 August Moody's revised downwards its forecast for GDP growth in the G20 economies, reflecting the impact of a more marked slowdown in China and more prolonged negative effects from low commodity prices, with slower growth in China making a significant rebound in commodity prices in the near term unlikely.

 

The company proposed a $2.5 billion fully-underwritten equity issuance, announced a suspension of 2015 final dividend ($1.6 billion) and 2016 interim dividend ($0.8 billion) to be paid in 2016, and identified additional measures to raise about $5.3 billion in cash proceeds from further capex cuts, the sale of various non-core assets, as well as further release of working capital by the end of 2016.

 

The affirmation of the Baa2/P-2 ratings reflects our view that the proposed measures will allow Glencore to build sufficient financial flexibility and strengthen its credit profile. The Baa2 rating is underpinned by the expectation that the company will redeploy capital and reduce gross debt to restore its leverage metrics closer in line with the Baa2 rating guidance, including gross adjusted debt/EBITDA at around 3.5x times in the next 12 months, from the approximately 4x times debt/EBITDA level that we project at the end of 2015 (prior to any gross debt repayment in 2H 2015). It also factors our projection that Glencore will continue to generate free cash flow over the next 6-12 months, on the back of CAPEX cuts and working capital inflow, and will further add to its solid liquidity position in the operating environment that we expect to remain challenging.

What would catalyze a downgrade? "The ratings could be downgraded if debt/EBITDA remains persistently higher than 3.5x" which also confirms what we said several weeks ago: it is all about the Glencore cash flows, which in the current depressed environment and mothballing of two Glencore mines, will drop precipitously in the coming months.

And then there was the biggest kicker of all: copper prices. To wit: "Notwithstanding the company's broad capabilities to take strengthening measures, Moody's has changed the outlook to negative to reflect the scope for a prolonged difficult market that may cause a slower recovery in Glencore's financial profile, particularly if copper prices were to decline to below $2.2/lb on a prolonged basis from Moody's current copper price assumption of $ 2.35/lb for 2016."

As a reminder, the reason why we said back in March 2014 that going long Glencore CDS is the best trade to hedge against a Chinese collapse, is precisely due to Glencore's underappreciated sensitivity to copper prices...

... which have since tumbled, and led to the recent surge in not only GLEN CDS but the record drop in its stock price.

What Moody's did with its warning after Glencore's deleveraging action announcement is to confirm our conclusion from Monday:

as a result of today's asset-stripping and equity-raising activity, Glencore is now a that much better levered bet on China's economy in a broad sense, and copper pricing in a narrow one. In fact, with every passing week that neither China's economy rebound nor copper reverses recent losses, expect GLEN CDS to accelerate its widening once again, and overtake its recent multi-year high level of 445 bps in very short notice.

Sure enough, as of this morning GLEN CDS was up over 30 basis point, and has regained one-fifth of the recent drop on the capital raise.

The worst news for Glasenberg is that at least one rating agency demands to be "shown" just how effective the company's capital raise will be instead of merely being "told." Which means that as we said on Monday of this week, as of this moment Glencore is an even better and more levered bet on not only copper, but China.

Finally, some have started to ask: what happens if Glencore were to fail? Well, since Glencore is not just a miner, but probably the world's largest commodity trading desk, and is a key commodity counterparty for everyone, the answer is simple: Lehman... only this time in the commodity space.

 

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Fri, 09/11/2015 - 09:59 | 6535581 falak pema
falak pema's picture

Only thingie that can save Mr Glasenberg : Copper, copper copper. Oh copper, puleese just GO UPPPPPP !

Fri, 09/11/2015 - 11:09 | 6536005 saveandsound
saveandsound's picture

btw, Swiss Franc is losing - just a little bit - ground every day...

 

Fri, 09/11/2015 - 12:42 | 6536477 Jumbotron
Jumbotron's picture

FINALLY !!!   

Now when this piece of shit blows up the Tylers can end every other story with.......  "SINCE GLENCORE !! "

Fri, 09/11/2015 - 13:06 | 6536574 DetectiveStern
DetectiveStern's picture

I'm still pisssed off I didn't get copyright on the phrase "since Lehman"

Fri, 09/11/2015 - 15:01 | 6537142 Dark Daze
Dark Daze's picture

There is nothing that is going to save their ass. China refuses, rightfully, to waste money supporting the DOA US economy, the rest of the world is in recession or worse and people all over the world are so freaked they have their hands firmly on their wallets which aren't coming out of their pants. Can't say I blame them. The entire system is not only fucked, it is totally fucking corrupt and needs to die.

Fri, 09/11/2015 - 10:12 | 6535613 venturen
venturen's picture

Let start breaking up these too big to fail....Goldman, Citi, JP Morgan, etc. There are plenty of smaller companies that respond to economic not being an oligopoly 

Fri, 09/11/2015 - 10:39 | 6535834 Huh Reeeally
Huh Reeeally's picture

Agreed, they're too big to succeed. Time for an AT&T type breakup.

Fri, 09/11/2015 - 12:08 | 6536278 Slomotrainwreck
Slomotrainwreck's picture

I'd settle for local banks with limited acounts, regulated by the individual states.  Oversight by locally owned independent insurance companies will be responsible to the account holders for total of all account losses due to irregular banking practices.

That's almost as close to a free market is possible as long as there is a coercive government monopoly.

Fri, 09/11/2015 - 13:55 | 6536798 Seer
Seer's picture

It's not going to be the meme of "smaller entities substituting for big ones" that folks would like to think.  Economies of scale.  SIZE means that P&E can be leveraged; smaller entitites won't be able to handle materials at the "cost-saving" levels the big ones do.

Eventually things WILL break-up, that's certain. And, in no way am I defending or advocating for (or betting/wagering on) any model or company; I just calll them like I SEE them (based on logic/fact).

Fri, 09/11/2015 - 14:58 | 6537121 Dark Daze
Dark Daze's picture

Yeah, so? As costs for smaller companies rise, the economy inflates which is exactly what they want. Just so long as wages keep pace, it could be exactly the ticket. I would rather take my chances with slightly higher prices and small firms than to have a couple of big ones go down the toilet. JPM and BAC are prime candidates.

Fri, 09/11/2015 - 15:36 | 6537294 Seer
Seer's picture

" I would rather take my chance"

I'm not BIASING my info here.  What YOU or I "want" means shit.  Mixing up your future in a  pile of emotions is a sure fire recipe for failure.

Wages will NOT "keep pace," it's all a downward vortex.  I've been  saying it for years: Economies of scale in reverse (and not until recently have people started to actually understand what this means [because they're now seeing it)].

 

Fri, 09/11/2015 - 10:12 | 6535650 ebworthen
ebworthen's picture

Wait...CDS?  Credit Default Swap? 

Wasn't that one of the drugs that casued the junkie to nearly die in 2008?

Fri, 09/11/2015 - 10:23 | 6535735 firstdivision
firstdivision's picture

Anyone know what entity is the underwriter of these CDS's?  Didn't AIG end their issuances after 2008?  I would love to know who issued these swaps so that I can short their stock.

Fri, 09/11/2015 - 10:35 | 6535771 Arnold
Arnold's picture

edger.illinoiscomptroller.com/index.cfm/find-one-of-the-comptrollers-reports/underwriters-participation-in-credit-default-swaps-report/

 

I don't deal with them, but i would guess part of the murder's row is listed there.

 

 

Fri, 09/11/2015 - 14:54 | 6537100 Dark Daze
Dark Daze's picture

probably jpm

Fri, 09/11/2015 - 10:41 | 6535844 ersatz007
ersatz007's picture

This time is different.

Fri, 09/11/2015 - 11:01 | 6535943 ThroxxOfVron
ThroxxOfVron's picture

"Wait...CDS?  Credit Default Swap? 

Wasn't that one of the drugs that casued the junkie to nearly die in 2008? "

 

It was actually an Eightball comprised of Fraud and CDS that gave the economy a heart attack.

The FED Banking system required the removal of several known but untreated malignancies and the transfusion of vast amounts of liquidity directly into the heart to get it's fat bloated junkie carcass up off the mat...

The United States still needs a new heart and circulatory system but the addled brain of Government seems unwilling to hazard or pay for a full monetary transplant.

Fri, 09/11/2015 - 10:15 | 6535684 Deadratsplat
Deadratsplat's picture

Take that you lousy copper!

Fri, 09/11/2015 - 10:27 | 6535761 Bangin7GramRocks
Bangin7GramRocks's picture

Register as a bank and get a fat juicy bailout complete with record bonuses.

Fri, 09/11/2015 - 10:40 | 6535836 LawsofPhysics
LawsofPhysics's picture

How many politicians do they own? 

Fri, 09/11/2015 - 11:03 | 6535973 Government need...
Government needs you to pay taxes's picture

Glencore needs to hire some Goldman Balsach political influence.  The only questions are: (1) can Glencore afford the bribes for the Golden Balsach's 'juice'; and (2) has Glencore ever successfully beaten the Balsach's commodity prop desks?  If yes, stick a fork in 'em.

Fri, 09/11/2015 - 15:37 | 6537305 Seer
Seer's picture

Problem is is that they're dealing with actual physical shit.  Banks can make shit up because there's no "evidence."  Picked the wrong business to be in! :-()

Fri, 09/11/2015 - 11:32 | 6536127 Vlad the Inhaler
Vlad the Inhaler's picture

Maybe instead of a bailout, the govt will just hand Glencore over to Goldman.

Fri, 09/11/2015 - 12:02 | 6536268 Sages wife
Sages wife's picture

Long "since Glencore".

Fri, 09/11/2015 - 12:03 | 6536275 silverserfer
silverserfer's picture

im certian this is a banker scheme across the entire commodity complex to crash and buy miners, oilfieolds, recyclers, etc. Its a hit, dont believe me, then why the fuck are finished goods across the board still experiencing sky high prices, plastic crap for the kids, gas, food, all priced to a inflationary envoirnment.   

Fri, 09/11/2015 - 15:47 | 6537349 Seer
Seer's picture

I believe it less about some conspiracy and more about the System.  Banking and commodities are linked at the hip.  If there's any "conspiracy" here it's based on self-preservation, something that we're not really going to resolve, especially when we're heavily linked to the System itself...

Fri, 09/11/2015 - 13:29 | 6536405 To Hell In A Ha...
To Hell In A Handbasket's picture

No amount of bad fate or cosmic Karma is enough for Glencore and its board to suffer in purgatory and eternal damnation. How many people know about the story of the Rich boys? Read this article......  http://www.bloomberg.com/bw/stories/2005-07-17/the-rich-boys  Glencore is in the top 3 of the most corrupt and rotten companies on the fucking planet, if not number 1, headed by Marc Rich himself(before death) and a cabal of Jews who basically have the oil selling and refinery game sewn up amongst themselves, as well as mining rights in Africa.

All U.S propaganda regarding Saddams' "Oil for food" program and its enforcement was the biggest joke in the industry. Marc Rich and co broke every facet of that sanction with little repercussion and as for Glencores' conduct in The Congo? An Australian Public Radio report said, "Glencore's history reads like a spy novel" and Mr Rich’s biographer, Daniel Ammann, said: “He went where others feared to tread – geographically and morally.” This is merely a euphemism for a morally bankrupt company that engaged in tax evasion, fraud, corruption, bribery and assassination as its business model.

Even by U.S standards of the non-enforcement of the law when it comes to corporate crime, corruption and fraud, such was the level of criminality across the board for Glencore and its subsidiaries, the FBI placed Marc Rich on their top 10 most wanted list. Right next to Osama Bin-Laden, so that tells you all you need to know about the conduct of Glencore. Oh yeah, I forgot to mention the right dishonourable Bill Clinton, pardoned Marc Rich on his last day of office with virtually no uproar from the main stream media, accept from politicians with a score to settle. 

Fri, 09/11/2015 - 15:42 | 6537328 Seer
Seer's picture

Wait, are you suggesting that power corrupts? :-)

Fri, 09/11/2015 - 19:14 | 6538011 sevensixtwo
sevensixtwo's picture

>solid liquidity position

 

lol

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