Glencore Implodes: Stock Plunges Most Ever, CDS Blow Out To Record Up On Equity Wipeout Fears

Update: And there it is: GLENCORE DEBT INSURANCE COSTS SURGE TO RECORD HIGH; 5-YR CREDIT DEFAULT SWAPS RISE 207BASIS POINTS FROM FRIDAY'S CLOSE TO 757 BASIS POINTS

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Just last Thursday we asked whether Goldman was "preparing to sacrifice the next Lehman", by which of course we meant the world's largest commodity trading counterparty, Baar, Switzerland-based Glencore which just two weeks ago unveiled an unprecedented "doomsday" capital raising and deleveraging plan which, in retrospect, was not enough.

The punchline of Goldman's report was that if commodity prices drop 5%, or even stay where they are, then Glencore's investment grade rating - the most critical foundation of its entire trading operation where a downgrade to junk would launch a collateral and margin-call waterfall cascade a la AIG - would be lost. 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.

As we added on Thursday, "what a junking of Glencore would do, is start a collateral demand waterfall cascade that the cash-strapped company simply would not be able to sustain." So having laid out the strawman, Goldman next, very conveniently, explains just what would take for the Investment Grade trap to slam shut: "it would only take a c.5% fall in spot commodities prices for concerns about its credit rating to resurface."

Of course, Glencore's leverage to commodity prices was first explained in our March 2014 post, in which we said buying Glencore CDS is the best and easiest way to bet on a Chinese credit and commodity crunch.

Fast forward to Monday morning when those who bought into Glencore's equity offering at 125p less than two weeks ago on September 16, are already down a whopping 43% (we won't even bother calculating the loss since the company's 2011 IPO), following the biggest daily drop in Glencore history, with the stock mauled some 27% at last check...

... on the heels of a note from Investec which said nothing Zero Hedge readers did not already know, but which is spooking everyone else into realizing that the commodity trading Titanic may well be sinking.

In the note Investec notes that "using a PE-based approach to evaluate equity value going forward, in proportion to debt, we note that the heavily indebted companies (GLEN, AAL) could see almost all equity value eliminated under spot conditions, leaving nothing for shareholders.... GLEN recent restructuring may prove just the start for the majors if spot prices prevail - this supports our concern that we are still a distance from the "value point" in the sector.

In other words, even if commodity prices remain unchanged, GLEN equity could be doughnut. If commodity prices continue dropping, then - well - just read out prediction from last year.

It also means that bondholders are next in line to hold the equity after a debt-for-equity, which has also pushed Glencore's bonds to record lows, with the GLEN €1.25b notes due March 2021 dropping three cents to 78 cents on euro, while the €750m bonds due March 2025 decline four cents to 67 cents. Both are at record lows.

If and when the bondholders realize a bankruptcy would leave them with negative enterprise value when netting out all the margin calls, we wouldn't be surprised to see bonds trading below 50 in the coming months if not weeks.

Meanwhile, those who listened to our reco to buy Glencore CDS at 170 bps in March 2014 can take the rest of the year off. As of this moment, GLEN Credit Default Swap were pushing on 600 bps, 4 times wider, and on pace to take out the 2011 liquidity crunch highs. After that, it's smooth sailing to all time wides and the start of a self-fulfilling prophecy which leads to the Companys's IG downgrade and the collapse of trillions in derivative notionals as what may be the trading desk of the biggest commodity counterparty quietly goes out of business.

Comments

[stock ene]

My own pictures of the "Super Moon" Eclipse.

http://nukeprofessional.blogspot.com/2015/09/super-blood-moon-eclipse-in-pictures.html

[nagan]

Whats GARTMAN doing now ? Anyone know ?

[Not if_ But When]

Don't know aout Dennis, but my newly launched namtraG Fund is doing fabulously well.

[mademesmile]

questions.

1. Are they basically Enron, ie, insurers of insurers?
2. Will they get bailed out?

[Greed is King]

The founder of Glencore is a close friend of the hated special peace envoy and ( in my opinion, and the opinion of the majority of Brits) traitor to the British people, Blair; I hope both of them lose every cent they have.

[Scooby Dooby Doo]

"Those who listened to our reco to buy Glencore CDS at 170 bps in March 2014 can take the rest of the year off. "

Just too illiquid for my taste.

3,414 contracts outstanding, 95 traded weekly. Meh.

Scooby was trying to sell some junk and buy the preferred on GLEN but couldn't in time.

Oh well.

[pitz]

How did a commodities 'trading' company ever get to be so big?  Commodities producers, sure, its understandable that they can scale up over time.  But trading?  In an ordinary economy, trading should not be a particularly value-adding activity.  Glencore's collapse illustrates a return to normalacy.

[Paracelsus]

Graph doesn't look like a curve at the end.Looks sorta vertical.Swiss bankers leaping in the near future? 

Lehman moment? Will they make it to Friday?

Oh,and I always love the "Tide goes out and we see whose been swimming naked".

[kelley805]

Here are some signs of a coming recession.

http://michaelekelley.com/2015/09/27/vix-predicts-pits-while-pundits-have-fits/

http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/

http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/

http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/

http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/

Here is how to respond.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Here is how to get your mind off this stuff.

http://michaelekelley.com/category/humor/

Good luck!

[OurUnitedStates]

ENRON

[earleflorida]

https://en.wikipedia.org/wiki/Marc_Rich     founded glencore and payrolled slick willy campaign while he wa still alive [pardoned]

http://en.wikipedia.org/wiki/Glencore

https://en.wikipedia.org/wiki/Bank_of_Credit_and_Commerce_International#The_Sandstorm_report

http://www.madcowprod.com/2012/02/20/americas-narcobank/          BCCI & BAC

'rothschilds bank of america' [and don't forget ML?]       http://www.liveleak.com/view?i_993_1385320465          If your interested in link, you must plug in "Rothschilds Bank of America" in search box''liveleak page' or Google'... just can't link site myself [exhausted?!?]

Part II: The Money Trail/ 1992 Election Campaign

 http://www.apfn.org/apfn/snowjob1.htm

http://www.washingtonexaminer.com/clintons-walmart-connection-fueling-lefts-doubts/article/2558826

vote for hillary or jeb baby-brorther bush dynasties,... but remember this-- the defence dept. controls the entire ussa government today