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With $19 Billion In Derivative Liabilties, Some Observations On Glencore's "Counterparty Risk"
Now that after long last the market has turned its attention not only to Glencore's mining operations, which as we have repeated said are a secondary aspect to the company's business model, the key being its trading operations which transact in billions of commodities every single day, and the stocks just plunged to fresh intraday lows down a historic 30%, here is a quick pointer at what traders should be looking at next: the company's own disclosure on counterparty risk from its most recent annual report.
But before we get into it, here is a reminder of Glencore's most recent disclosed financial situation: $30Bn net debt on $6.5bn in EBITDA. EBITDA, which as a reminder, drops by $1.2BN for every 10% drop in copper prices according to the company itself.
So here is what "could go wrong" form the horse's mouth. First on counterparty credit in a world of plunging commodity prices:
That's the big picture; here is the drill down on where GLEN has non-current receivables as of Dec. 31, 2014:
The Company's approach to "credit risk":
A breakdown of Glencore's "fair value" breakdown in Level 1 through 3 assets, which amount to $4 billion in total.
The offseting liabilities:
Perhaps the punchline: $19 billion in derivative liabilities. As a reminder, every collateral netting chain (this is for the very confused "gross is not net" punditry out there) is only as strong as the weakest counterparty. Should GLEN fail, those gross liabilities become net.
And as reminder, GLEN has $30 billion in net debt.
Finally, here is Glencore's core value proposition: arbitraging everything in the commodity "value chain"
The question is what happens when the "value" chain - after suffering a depression-like collapse - goes into reverse? Simple: the arbitrageurs turn against the "arbitrageur" itself.
Because while Glencore is very eager to discuss others' counterparty risk, it - as expected - has little to say when it, itself becomes the counterparty risk itself. In fact, the only real mention of the all-important Investment Grade rating that GLEN must keep is the following:
In light of the Group’s extensive funding activities, maintaining strong BBB/Baa investment grade ratings is a financial priority/target. The Group’s credit ratings are Baa2 (stable) from Moody’s and BBB (stable) from S&P.
And this:
Glencore’s objectives in managing its “capital attributable to equity holders” include preserving its overall financial health and strength for the benefit of all stakeholders, maintaining an optimal capital structure in order to provide a high degree of financial flexibility at an attractive cost of capital and safeguarding its ability to continue as a going concern, while generating sustainable long-term profitability. Paramount in meeting these objectives is maintaining an investment grade credit rating status. Glencore’s current credit ratings are Baa2 (stable) from Moody’s and BBB (stable) from S&P.
Actually, Glencore does hint at what the next step most likely will be once the rating downgrade headline hits:
Glencore actively and continuously monitors the credit quality of its counterparties through internal reviews and a credit scoring process, which includes, where available, public credit ratings. Balances with counterparties not having a public investment grade or equivalent internal rating are typically enhanced to investment grade through the extensive use of credit enhancement products, such as letters of credit or insurance products.
So to all of Glencore's counterparties, good luck "ringfencing" the trillions in transactions that end up with a $19 billion liability exposure, and that's just on the book. And how fast before the market starts looking at the counterparties themselves...
The only question now is "when" does the junking hit. The answer, as far as we are concerned, whenever Goldman Sachs is ready to pull the plug.
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Lehman x 10
Paging Goldman Sachs....Paging Goldman Sachs.
Time to see who is wearing a swimsuit.
I hope it's not Mr. Yellen. Eye bleach!
Could we finally see a really derivative blowout? One that they can't just say didn't happen/won't pay?
You aren't going to see a blowout if all we are talking about is 19 billion. That's a drop in the bucket when considering over a quadrillion in derivatives in existence and a number easily papered over by any gov't interested in doing so.
$19B is big number, but I can't go along with ZH claim that the gross becomes the net. Glencore, like all commodity desks, plays both sides of most trades. They buy and sell the same positions almost simultaneously to their clients, wholesale counter parties and financial market makers. So a $19B wind-down wouldn't really be $19B of destroyed notional value. Further, if the ship starts sinking. another market maker, ESPECIALLY one with exposure to Glencore AND access to unlimited ZIRP fiat, can and likely would swoop in a scoop up the positions, if not the company.
Bad, yes, but catostrophic? Doubtful.
What does any of this financial bullshit have to do with anything in the tangible, physical world where actual things get produced? Nothing. The whole derivatives market should be just wiped out.
Jacob Lew isn't the former CEO of Rio Tinto, BHP or Anglo American by any chance?
Building the house with cards on a windy day.
cranking up the road kill grill as we speak
The deer.....the headlights
The bug......the windshield
The leverage......the snapping of the lever
Ashes, ashes............
Ashes, ashes
All fell down.
Ring around a rosie, pocket full of posey, ... Rhyme from the Black Death era when a large percentage of Europe's population gave a tremendous sneeze, and fell down. Dead.
Enron 2.0
Enron is the template for the new marketplace because it worked soooo well......
They don't build anything to last any more. Why should they build companies to last?
Run the place hot for a few years, get your insano-money and start the Start Trek "auto destruct" countdown on your way out the door. Get far enough away so you're safe when the warp core breaches.
This is pretty much what they are. Enron went from an acutal power producer to biggest power trader. All we need now is to find out E&Y looked the other way while GLEN racked up the debt into their shell LLC's.
Yep, I was thinking the same thing.
Glencore's valuations are based also on foreward moving income based on "models" that said how much ore was in which mine.You can't go riskier then that.
And the Enron debackle was 7 billion in size, glencore... way bigger.
It's a big card at the corner bottom of the house so to speak.
I wonder how Alcoa will do.... same shit over there.
Lehman, Enron and WorldCom x 10
I love the smell of napalm in the morning.
hey, buddy, can you spare a derivative?
Whatever. The same criminal fuckers that decide whether or not something is actually a"credit event" are the same criminal fuckers that profit from or decide whether or not the world ends from such event. the CDS market is a fucking joke, like all bullshit paper promises and debt today. It is all fraudulent!!!
Get long sharecropping and guillotines already!!!!!
May God have mercy on all of us.
God helps those, who help themselves.
Get busy living or get busy dying, your choice. For now...
The CDS issuers take the fees with no intention of ever paying on any eventual insurance claim. But the scam is what keeps a lot of these "investments" palatable, because they are so risky. Net of net, everyone buys the CDS so they can invest in very risky assets with OPM, nobody pays on an event, nothing melts down, and the multiple-quadrillion $ in outstanding CDS coverage that everyone points to is as meaningless as the clouds in the sky. The OPM part is the only problem, and as we have seen (MF Global) the evaporation of OPM is not an actual issue. When "those other people" figure it out, it will be too late.
Time to flush the toilet, the stench....
Clogged.
Big time.
Where's the clip of the dad puking on the roller coaster ride?
oh, here it is.
https://www.youtube.com/watch?v=jj6wlAthFdQ
Back on Jun 3, 2014 the OTC derivatives market notional topped $700,000,000,000,000.
Compared $96,000,000,000 isn’t even 1%.
Counterparty risk, and THEIR further daisy chained risk flows, are a big part of this.
What if there was (gasp) leverage on the part of Goldcore's customers? And then the collateral goes doughnut? Eh, just start multiplying.
How many nice, safe, lying insurance firms and pension plans wanted a piece of the commodity 'thing' at arm's length? How many were sold into it at such arm's length, and long enough ago that they don't even know?
This is what finanancial 'advisors' do. They did it with junk housing CDS and they do it with this stuff.
Have you checked your church, school district, volunteer fire department and close family's investment funds lately? Oh but why worry. Surely their 'advisors' are on it.
All roads lead to Godman...I mean Goldfein...dammit, Goldblank...no,no, Goldgod...sigh. Y'all know what I mean.
lol
its funny how you monkey-train us to place blame on goldmans. ;)
twss
...
Ignoring counter party risk is like bungee jumping without a bungee cord.
<delete>
I think you have the bungee cord, you just don't know if its attached to anything at the end opposite your feet. All the way down, you see it on your book, but when you need it, it doesn't do anything.
Good way to look at it -
$19 billion in derivatives? Pfftt, what a piker says Douche bank.
Yellen print that up no problem. They are banksters. That's what banksters do.
To bad they dont have a bunch of Democrat voters...or the USA would bail them out......save the jobs and all of that crap
Does that $19B number include Cleared derivatives (enforced master agreement language? ) or just OTC, because if it includes cleared paper, this is a lot less incendiary than it sounds.
Which bank(s) has(have) issued Glencore CDS ?
...the banks doing "god's work"?
We will never know the answer to that question..they keep it very hidden..until they need a bailout..then they run to the treasury.....
I would guess BAC, JPM and GS
We Lehmaned some folks.
/squid
who? ourselves?
I've been hard on ZH lately - but this is ZH at its best. You won't get this info anywhere else
why nowhere else? he's quoting goldman and boaml
I was speaking of mainstream sources. I don't get Goldman e-mail alerts
C'mon. Who are the counterparties and can we sell that risk?
you have to be on the inside to do that shit
John Mack and Hayward have a knack....
http://www.wsj.com/articles/SB120525396278627551
http://www.wsj.com/articles/SB10001424127887323734304578540782117026550
http://www.ft.com/intl/cms/s/0/3d46ebf6-d679-11e3-907c-00144feabdc0.html...
you didnt incinerate that company we did
Its all GREEK to moi
Glencore is blaming the EVIL hedge funds for attacking their pristine balance sheet
Dow is below 16,000 now.