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Commodity Trading Giants Unleash Liquidity Scramble, Issue Record Amounts Of Secured Debt

Tyler Durden's picture




 

Earlier today, in its latest attempt to restore confidence in its brand and business model after suffering a historic stock price collapse, Glencore - whose CDS recently blew out to a level implying a 50% probability of default - released a 4 page funding worksheet which was meant to serve as a simplied summary of its balance sheet funding obligations and lending arrangements to equity research analysts who have never opened a bond indenture, and which among other things provided a simplied and watered-down estimate of what could happen if and when the company is downgraded to junk.

Meanwhile, in a furious race to shore up as much liquidity as possible, Glencore - which a month ago announced a dramatic deleveraging plan - and its peers have been quietly scrambling to raise billions in secured funding. Case in point none other than Glencore's biggest competitor and the largest independent oil trader in the world, Swiss-based, Dutch-owned Vitol Group, whose Swiss unit Vitol SA earlier today raised a record $8 billion in loans.

It is not alone.

As Bloomberg reports, another name profiled previously here, privately-held (but with publicly-traded debt) Trafigura  "won improved terms on a $2.2 billion loan refinancing deal on Oct. 1 via a group of 28 banks. Swiss commodity traders Gunvor Group Ltd. and Mercuria Energy Group Ltd. are also marketing credit facilities totaling $2 billion."

Louis Dreyfus Commodities, the world’s largest raw-cotton and rice trader, said in its interim report last month that it had six revolving credit facilities with staggered maturity dates totaling $3.3 billion. In June, it amended and extended its North American facilities totaling $1.6 billion and in July it refinanced a $400 million Asian lending facility with the company securing an option to request an increase of $100 million.

 

Noble Agri, the agricultural commodity trader majority owned by China’s Cofco Corp., attracted four new lenders to its $1.58 billion one-year revolving credit facility, people familiar with the matter said this month.

In short - a race against time to pledge as much unencumbered collateral as possible for future funding needs, because as every CEO knows you raise capital when you can, not when you have to. Yet this is odd, because even as the companies hold investor meetings and publicly comfort investors that they are adequatly funded and see no need for a liquidity-raising scramble, that's precisely what the world's commodity traders are doing.

Bloomberg's take was more optimistic: "The transactions show banks are still eager to loan money to commodity traders even after debt concerns caused by wild swings in Glencore’s stock and bond prices."

The new loans and refinancing signal banks are comfortable lending to commodity traders, whose business models allow them to profit from volatility and lower financing costs amid weaker prices for raw materials.

According to Bloomberg, Vitol’s record credit facilities from a group of 57 banks were increased by a third after the initial $6 billion sought by the trading house was oversubscribed by $2.7 billion, the Rotterdam-based company said in a statement. The facilities, refinancing a debt package signed 12 months ago, are the biggest in the firm’s 49-year history, a Vitol spokeswoman in London said.

Then comes even more spin:

The loan package, coming after Trafigura last week agreed to lower lending rates, suggests some analysts don’t understand the business of trading houses, which can benefit from lower commodity prices and the current contango market structure that allows them to profit by storing oil because forward prices are higher than current costs.

Actually analysts (at least credit) understand the business of trading houses very well; what Bloomberg's reporters don't seems to understand, however, is the principle of muturally assured megaleverage destruction, or the implied threat for a company's secured lending syndicate that a borrower which already has billions of exposure to banks has all the leverage in demanding even more debt. After all, should Vitol fail, it would lead to a cascade of bank failures as all the banks that have lent money to the giant commodity trader are forced to charge off their exposure, in the process leading to serial defaults among undercapitalized financial institutions.

It is these institutions whose credit officers underwrote the loans, that are the ones who "don't understand the business of trading houses" because based on the recent collapse in publicly traded securities, they never modelled what happens to cash flows in a world in which the price of oil, copper,  zinc, aluminum or other commodities, suffer a 50%+ plunge in prices.

“Given the recent turbulence in the commodities space, we have been repeatedly asked by investors on the banks’ exposure to commodity traders,” analysts at Sanford C. Bernstein led by Chirantan Barua wrote in a note Monday. 

As they well should, and in order to avoid answering, the banks are perfectly happy to throw a little more good money after lots of bad money in order to avoid remarking their entire exposure to the sector to something resembling fair value.

But the day of remarking is coming: as Bernstein calculates, commodity traders have raised at least $125 billion of debt, of which about $75 billion is loans. In other words, there is about $75 billion in secured debt, collateralized by either inventory and/or receivables collateral whose value has cratered in the past year, and as a result the LTV on the secured loans has soared. It is this that is prompting the panicked banks to be more eager to provide funds to the suddenly distressed energy-trading sector than even the borrowers themselves. And after all, if the banks do blow up, there is always the taxpayer-funded bailout as a last reserve.

And here is a pop quiz to either analyst, or Bloomberg writers who don't "understand the the business of trading houses" - if you issue secured debt to shore up liquidity as a result of what is fundamentally a massively overlevered capital structure, does the pro forma debt increase or decrease. This is not a trick question.

The good news for the Vitols of the world is that by pledging even more of their unencumbered assets to banks, they buy themselves a few more months, or quarters, of liquidity to pay down upcoming maturities and interest. Which is what Glencore did with its "doomsday" plan in early September... a plan which calmed the stock for all of two weeks before investors saw right through it for what it was: a desperate scramble to put lipstick on a declining-stage supercycle pig.

In the meantime, the end result is this: companies that are even more levered to commodity prices in a world in which at last check commodity prices, a proxy for China's economy, are sliding. Which, incidentally, was our thesis in March of 2014 when we said that buying Glencore CDS is the best way to trade China's hard landing. This is precisely what happened.

Which is why both the companies, and their lending banks, better pray that commodity prices pick upin the coming weeks and months, becuase for the Vitols, the Glencores, the Trafiguras, the Mercurias and so on, that is all that matters. Ironically, by levering up even more, they bought themselves some time now, but if and when the next leg down in the commodity supercycle takes place, the pain will only be that much greater.

 

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Tue, 10/06/2015 - 22:01 | 6638269 Soul Glow
Soul Glow's picture

Now everyone's seen Rollover, right?

Tue, 10/06/2015 - 22:14 | 6638294 gmrpeabody
gmrpeabody's picture

8 billion....?

I had to borrow eight bucks this morning to pay for breakfast..., 2 eggs and hash browns with toast. 2 more bucks for a cup of coffee, and of coarse a 20% tip was expected. But I don't want anyone to think that prices are going up..., or service is going down.

$12 breakfast..., my phucking ass...

Tue, 10/06/2015 - 23:28 | 6638437 espirit
espirit's picture

Got Collateral?

'What's in your wallet?'

An ASE might pay for a breakfast.

Tue, 10/06/2015 - 23:31 | 6638452 38BWD22
38BWD22's picture

 

 

When almost any problem arises, it is almost always better to deal with it right away.  Even to pay for your mistake (etc.) right away.

Problems typically get worse when ignored.

Tue, 10/06/2015 - 23:47 | 6638484 847328_3527
847328_3527's picture

... 2 eggs and hash browns with toast. 2 more bucks for a cup of coffee ...

 

Braggard! Who has that kind of dough these days to feast like a king?

Wed, 10/07/2015 - 01:02 | 6638563 wee-weed up
wee-weed up's picture

 

 

$12 breakfast

Janet says her breakfast at the Fed Headquarters is free...

So you must be an inflation mongerer.

Wed, 10/07/2015 - 04:05 | 6638689 The Pope
The Pope's picture

I tossed my hash browns & eggs breakfast in a boating accident.

Wed, 10/07/2015 - 06:19 | 6638765 negative rates
negative rates's picture

I payed the same price but got a pound of bacon and a cute waitress throwed in. Filled me right up too. 

Wed, 10/07/2015 - 06:53 | 6638799 VinceFostersGhost
VinceFostersGhost's picture

 

 

I get it....you're a bunch of bookies.

https://www.youtube.com/watch?v=g4Uv4ftekaI&list=RDg4Uv4ftekaI#t=0

Wed, 10/07/2015 - 07:05 | 6638820 CuttingEdge
CuttingEdge's picture

How much ZIRP has Glencore been lapping up for share buybacks in the past five years?

They always say payback is a bitch.

Wed, 10/07/2015 - 11:14 | 6639791 asteroids
asteroids's picture

The FED starts QE. The miners and metals sky rocket. Greedy CEO's take advantage. Years later the metals crash. Coming soon to a movie near you, the miners will crash. Unintended consequenses of FED actions!

Wed, 10/07/2015 - 08:29 | 6638973 PirateOfBaltimore
PirateOfBaltimore's picture

gotta go the baltimore route: pack of cigs, tasty kake glazed pie, and a royal farms coffee. 

 

aka breakfast of champions 

Tue, 10/06/2015 - 22:23 | 6638323 seek
Tue, 10/06/2015 - 23:34 | 6638455 malek
malek's picture

Now everyone has already seen in 2008/09 that they will break the rules all the way to freezing the stock and capital markets completely (up to "yes you still own that $1 million in your account, unfortunately you are only allowed to withdraw $100 a week... but that's only temporary!) -

instead of allowing such a thing as in the movie "Rollover" to ever happen...

Tue, 10/06/2015 - 22:06 | 6638281 Dead Canary
Dead Canary's picture

Have you seen the latest on King World News. They have a chart that shows silver is ready to:
E X P L O D E ! !

Tue, 10/06/2015 - 22:08 | 6638287 arbwhore
arbwhore's picture

So.... nothing new then.

Wed, 10/07/2015 - 04:09 | 6638692 The Pope
The Pope's picture

When you play Wheel of Fortune, and Vanna has thus far revealed _ _ PLODE , it's important to buy a vowel right then & there.

Wed, 10/07/2015 - 05:52 | 6638739 Ides of November
Ides of November's picture

That would have to be IMPLODE wouldn't it?

Given the E has already been used obviously.

Tue, 10/06/2015 - 22:57 | 6638339 JenkinsLane
JenkinsLane's picture

Do they have a chart showing the number of retail investors who have lost 50% or more of their capital in the last 4 years

by listening to their bullshit?

 

I'll summarize everything KWN has ever said and will ever say - "Gold & silver are going to go up!" What's more, they will in due

course, perhaps massively and then they'll be crowing about "having called it" until kingdom come.

 

As the saying goes, "Retail, the crop that never fails."

Wed, 10/07/2015 - 00:40 | 6638520 Jack Napier
Jack Napier's picture

Anybody who invested in physical metal with a thought rolling around in their head hasn't lost any capital. I might decide to sell my Y2K lunar dragon for the going rate of $100 even though I paid $50 for it, or I might not. How about Somalia elephants I bought for $30 that are retailing for $50? How about timberwolves I bought for $30 that retail for $40? Pandas I bought for $30 that retail for $60? Even last year's lunar horse is going for $35-$40 if not more. Kookaburras, koalas, libertads, ATBs.. all hold their value pretty well.

If you invest in paper, you're asking to get burned.

If you measure wealth in debt notes instead of ounces, you're asking to be fleeced.

Tue, 10/06/2015 - 22:11 | 6638291 Salah
Salah's picture

Secured by what? those Nigra-IRA-collateralized-zero-coupon-quantum-derivative warehouse receipts?

Oh Yeah, that shit...sho 'nuff

 

Tue, 10/06/2015 - 22:23 | 6638324 Buckaroo Banzai
Buckaroo Banzai's picture

Shhhhh...

Can you hear it?

It's the sound of rehypothecation...

Tue, 10/06/2015 - 22:27 | 6638331 Yen Cross
Yen Cross's picture

 Glencore is toast. There's no if's, and's or but's about it.

 It's just a matter of when the event takes place. 

 Food for thought/--- Those triple rehypothecated copper contracts are coming home to roost.

 

Tue, 10/06/2015 - 22:35 | 6638347 seek
seek's picture

We can only hope. Rehypothecation unraveling across the commodities complex would make a lot of ZH'ers very wealthy.

Tue, 10/06/2015 - 22:38 | 6638351 Yen Cross
Yen Cross's picture

 It's already happening my friend. One of the most levered sectors is commodities because of their liquid nature.

 

Wed, 10/07/2015 - 04:10 | 6638693 The Pope
The Pope's picture

mmmmmmmmmmmmmmmmmmmmmmm TOAST!

Wed, 10/07/2015 - 06:23 | 6638769 negative rates
negative rates's picture

It's curtains for commodities no doubt.

Tue, 10/06/2015 - 22:41 | 6638358 abyssinian
abyssinian's picture

Just call Yellen, she can print you $8 billion by tomorrow. 

Tue, 10/06/2015 - 22:43 | 6638365 vincent
vincent's picture

Right on Yen.

No wonder copper has'nt fallen through the floor yet.  They literally control 50% of the market.

There will be no unwinding yet. Pretty sure that's, in part, what all the cash is for.   AND, what about copper as collateral in general?

When the time does come those books are gonna be a good read.

 

Tue, 10/06/2015 - 22:45 | 6638370 pitz
pitz's picture

Hopefully the markets bury these scamming middlemen.  What value do they really add anyways for the billions they've taken from commodity producers and consumers?

Tue, 10/06/2015 - 22:49 | 6638380 Catullus
Catullus's picture

Why do they need more money? I thought they were just middlemen... Are they banking on an increase in trading activity?

Or Perhaps these trades aren't fully backed by actual inventory...

Tue, 10/06/2015 - 22:58 | 6638393 DirkDiggler11
DirkDiggler11's picture

There is a direct correlation between the financial situation of the "trading houses" and the number of warehouse "explosions" in China. Bad time to be a Chineese insurance company as well ....

Tue, 10/06/2015 - 23:04 | 6638399 City_Of_Champyinz
City_Of_Champyinz's picture

Fuckin' A, shit is getting really interesting...  Who the fuck in their right mind would lend...oh wait

Tue, 10/06/2015 - 23:08 | 6638409 bluskyes
bluskyes's picture

Time for a reverse buyout of Goldman Sachs, or JP Morgan. Gotta get TBTF before you fail.

Tue, 10/06/2015 - 23:12 | 6638417 news printer
news printer's picture

off commodity

Second German woman evicted from her home to make way for refugees

 

A woman in Germany is being evicted from her home of 23 years to make way for asylum-seekers, in the second such case to emerge.

Gabrielle Keller has been given until the end of the year to leave her flat in the small southern town of Eschbach, near the border with France.

The flat belongs to the local municipality, which says it is needed to house refugees.

“I think it’s a scandal to throw tenants out of their apartments,” the 56-year-old Ms Keller told SWR television. “I can’t see the sense of it.”

http://www.telegraph.co.uk/news/worldnews/europe/germany/11902296/Second-German-woman-evicted-from-her-home-to-make-way-for-refugees.html

Wed, 10/07/2015 - 07:07 | 6638822 Sparkey
Sparkey's picture

Neither Germans nor refugees are 'Important' the people who organize, and fund the flood are, this is just a little reminder to the Germans, all of them,  about their true position in the grand scheme of things.

Tue, 10/06/2015 - 23:12 | 6638419 assistedliving
assistedliving's picture

"we said that buying Glencore CDS is the best way to trade China's hard landing".  nice call.

pray to _llah at least Tyler is making some phucking $$$ in this phucking "market"

Tue, 10/06/2015 - 23:16 | 6638424 buzzy_the_pirate_dog
buzzy_the_pirate_dog's picture

Bullish

 

Tue, 10/06/2015 - 23:32 | 6638454 motorollin
motorollin's picture

So the banks doubled down with these loans. 

 

Fuck 'em. Burn it to the ground.

Wed, 10/07/2015 - 02:32 | 6638642 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

Not entirely...

I guarantee this round of funding is fully secured and collateralized with a ton of covenants. They have likely just turned a lot unsecured creditors into little more than equity holders.

This is usually the case of a last ditch effort to secure any financing before the well is completely dry. More often than not, bankruptcy is on the way soon.

Wed, 10/07/2015 - 06:33 | 6638781 Arnold
Arnold's picture

Bunch of super salesmen with easy financing terms.

You know it's gonna blow.

They know its gonna blow.

The tremors are there.

Vesuvius is smoking.

Wed, 10/07/2015 - 07:36 | 6638871 Montani Semper ...
Montani Semper Liberi's picture

Might be time for the sacrificial virgin.

Tue, 10/06/2015 - 23:41 | 6638470 tommylicious
tommylicious's picture

FUK DEY COLLECTIVE ASSES BIATCHES!

Tue, 10/06/2015 - 23:43 | 6638474 Redart
Redart's picture

All true but, but, wait for BOJ. Tonite 1 minute before Koruda, buy usdjpy, buy nasdaq and short 10yr note futures. Then go to sleep. End

Wed, 10/07/2015 - 00:02 | 6638498 GRDguy
GRDguy's picture

They're sure creating a hell of a lot of new promises to keep from dealing with failed old promises. So what do they do when they fail to keep the new promises!?  (rhetorical question.)

Wed, 10/07/2015 - 00:07 | 6638502 Omega_Man
Omega_Man's picture

Don't you get it?? This is ploy for US and western banks to own everything... they will hold the debt.... Gold mines, all mines, US oil,.... this is their take... and to recapitalize their system.... China and Russia better lend these firms money pronto and suck up the cheap shares..

When the banker calls the loan... fat lady sings, this is nationalizing resources . nice trick.

Wed, 10/07/2015 - 02:29 | 6638639 Phoenix901210
Phoenix901210's picture

So in simple terms then... More of the same!

Wed, 10/07/2015 - 05:54 | 6638742 Youri Carma
Wed, 10/07/2015 - 06:16 | 6638760 buzzsaw99
buzzsaw99's picture

Vitol’s record credit facilities from a group of 57 banks were increased by a third after the initial $6 billion sought by the trading house was oversubscribed by $2.7 billion...

this shit ain't over. not by a long shot.

Wed, 10/07/2015 - 06:51 | 6638796 spanish inquisition
spanish inquisition's picture

So insolvent countries are propping up insolvent banks, who are loaning money to broke ass trading companies, that will try to eke out an existance until they can figure out how to reword derivatives, so they don't trigger a default cascade.

Sounds reasonable, where can I buy this stuff.

Wed, 10/07/2015 - 07:29 | 6638860 Last of the Mid...
Last of the Middle Class's picture

QE to stock buybacks to massive debt issuance. Hmmmm what could possibly come next?

Wed, 10/07/2015 - 08:28 | 6638970 Da Nut Job
Da Nut Job's picture

Things might get interesting when Alcoa reports....

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