Glencore Explains What Would Happen If It Is Downgraded To Junk

Tyler Durden's picture

As part of its ongoing scramble to defend itself against "speculators" and concerns about its balance sheet, earlier today Glencore released a 4 page "funding worksheet" detailing all of its obligations.

Among the highlights was Glencore's disclosure of total available liquidity as of this moment, which the firm reported to be materially above its June level of $10.5 billion:

At 30 June 2015, available committed liquidity was $10.5 billion (p. 71 of 2015 Half-Year Report). As of today, committed available liquidity is materially above June’s level, given the recent $2.5 billion equity placement, the business generating positive free cashflow and the ongoing focus on delivery of the various other debt reduction measures, including lower net working capital. Further delivery of the debt reduction programme, including the $2 billion target for asset disposals, will similarly enhance liquidity levels.

It also presented its sources of funding among which the well-known $31.1 billion in bonds, as well as $20 billion in short-term funding split between a $15.25 revolver (of which a "substantial portion" is undrawn), $1.2 billion in AR/Inventory secured funding, and $3.4 billion in bilateral bank facilities. Glencore was quick to point out the gullibility of its bank lenders: "No financial covenants, no rating events of default or rating prepayment events, no material adverse change events of default or material adverse change prepayment events."

Next Glencore details the terms of its notes and cross-guarantees which it lays out as follows:

$36.5 billion notes outstanding at 30 June 2015, including $1.9 billion maturing in October 2015. See Appendix for full details.

  • Notes are issued on a pari passu basis, applying a cross guarantee structure introduced at the time of the Xstrata acquisition (see Moody’s and S&P reports dated 7 May 2013 and 19 June 2013, respectively).
  • Glencore Group bonds (issued by Glencore Funding LLC, Glencore Finance (Europe) AG and Glencore Australia Holdings Pty Ltd) have guarantees from Glencore plc, Glencore International AG and Glencore (Schweiz) AG (previously Xstrata (Schweiz) AG).
  • Following the Xstrata acquisition, legacy Xstrata bonds (issued by Xstrata Finance (Canada) Limited, Xstrata Canada Financial Corp, Xstrata Canada Corporation and Xstrata Finance (Dubai) Limited) also now have guarantees from Glencore plc and Glencore International AG, implemented by way of supplemental indentures.
  • Similarly, the outstanding USD notes issued by Viterra Inc. in August 2010 have guarantees in place from Glencore plc and Glencore International AG.

Glencore also notes the $17.9 billion in Letter of Credit commitments it had outstanding as of June 30:

As part of Glencore’s ordinary sourcing and procurement of physical commodities and other ordinary marketing obligations, the selling party (or Glencore voluntarily) may request that a financial institution act as either a) the paying party upon the delivery of product and qualifying documents through the issuance of a letter of credit or b) the guarantor by way of issuing a bank guarantee accepting responsibility for Glencore’s contractual obligations.


The LC is not incremental exposure to that already reported in the financial statements. An LC is only a “contingent” obligation, disclosed as such in Glencore’s financial statements i.e. becomes a liability in the event that Glencore does not perform on an already recorded liability. The underlying transaction / procurement liability is recognised within “Trade Payables” in Glencore’s balance sheet. At 30 June 2015, $17.9 billion of such LC commitments have been issued on behalf of Glencore, with the respective liabilities reflected within the $28.1bn of recorded accounts payables. The contingent obligation settles simultaneously with the payment for such commodity. Availability is substantially higher, such that the vast majority of these Glencore facilities remain undrawn.

An interesting tangent is when Glencore discusses it readily marketable inventories:

Represents those marketing inventories that are contractually sold or hedged. At June 30 2015, total inventories were $23.6 billion, of which Marketing RMI were $17.7 billion.


For corporate leverage purposes Glencore accounts for RMI as being readily convertible to cash due to their very liquid nature, widely available markets and the fact that price exposure is covered by either a forward physical sale or hedge transaction.

Which brings up the very interesting question: with Glencore touting its revolver availability, and its various secured facilities, just how is Glencore marking the fair value of its inventories, because a ton of copper a year ago as collateral is worth just a little bit more than a ton of copper currently. We are confident Glencore's banks are aware of this.

But finally, and most importantly, Glencore presents what it believes would happen if it is downgraded from Investment Grade to Junk. This is what it says:

Glencore is undertaking measures to strengthen its balance sheet, including a material debt reduction, that the company expects shall serve to protect and maintain a strong BBB/Baa credit rating.


In the event of a downgrade by Standard & Poor’s and/or Moody’s from current ratings to the level(s) immediately below, a ratings’ grid in the $6.8 billion 5-year revolving credit facility provides for a modest additional margin step-up. As this 5-year revolving credit facility is expected to remain fully undrawn, the net additional effect would only be 35% of this modest step-up margin, being the applicable commitment fee only. The maximum margin for sub-investment grade rating from either Standard & Poor’s or Moody’s is 1.10%. There is no ratings grid in relation to the $8.45 billion revolving credit facility. In addition, there are $4.5 billion of bonds outstanding, where a 125bps margin step-up would apply, in the event that the bonds were rated sub-investment grade by either major ratings agency.

Which reminds us of the waterfall analysis being shared around in the weeks before the AIG downgrade unleashed a series of events that ultimately led to the insurance company's bail out. It too presented glowing picture of the potential risks. In the end it was very deficient. One can only hope that Glencore has learned the lesson of never misrepresenting the worst case scenario.

Full letter below (link)

Glencore Funding

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venturen's picture

Oh look a Black Swan

Deathrips's picture

Its easy to confuse from a distance..but im pretty sure its a vulture circling a dead corpse.

Silver just hit 16.


Physical..lets get physical.


tmosley's picture

Planning fallacy teaches us that the most likely scenario is usually just a little worse than the worst case sxenario.

So, there's always that to look forward to 

Save_America1st's picture

Just send Jon Corzine in there to clean the place up.  But stand waaaaaaaaaaaaaaaay might just end up like WTC #7

Captain Debtcrash's picture
Captain Debtcrash (not verified) Deathrips Oct 6, 2015 10:59 AM

A critical mass default will happen again, Glencore is a perfect candidate. 

Money Counterfeiter's picture
Money Counterfeiter (not verified) Captain Debtcrash Oct 6, 2015 11:19 AM

Give them a MF printer for gods sake.

LawsofPhysics's picture

Yes, this debt-induced liquidity trap has turned into a black hole.  No amount of QE can fill the void that will appear when the next mass default occurs...

hedge accordingly.

pods's picture

Analyst:  I'm fuzzy on the whole good/bad thing. What do you mean, "bad"?

Glencore: Try to imagine all life as you know it stopping instantaneously and every molecule of Glencore exploding at the speed of light.

Analyst:  Right. That's bad. Okay. All right. Important safety tip. Thanks, Egon.


A Nanny Moose's picture

Are you threatening me? - Cornholio

upWising's picture

Black Swans need to eat SOMETHING.

Just might as well print out and grind up this report from Glencore and give to the Black Swan(s) to eat.  If they poop it out, it just MIGHT make some fertilizer for the famous Green Shoots!

Problem solved.

KnuckleDragger-X's picture

Whistling past the graveyard. Since what really counts is covering bond and loan payments, a magic line of credit isn't going to cover their ass as much as they think and it won't take much to push them over the edge. They may be a black swan, but they are a member of a large flock flying in close formation.....

yrad's picture

"Downgrade us and the Market gets it"


A Nanny Moose's picture

Hold it men! He's not bluffing.

Deathrips's picture

Derivatives dominoes is what it would look like!


Run fer them there hills!



KnuckleDragger-X's picture

Shhhh... don't say the 'D' word, they might hear you.....

junction's picture
I am waiting for the header: "Obama Explains What Would Happen If It Is Downgraded To Junk"
yogibear's picture

Right now it's mark to fantasy rather than mark to market.

Tallest Skil's picture

When the economy collapses, he'll just write an executive order that says "The economy has not collapsed" and that will fix everything.

A Nanny Moose's picture

Something the about emperor's lacking clothing. At least it would solve the gender mystery surrounding Barry and the Wookie.

goldsaver's picture

His junk is already downgraded, don't see how much lower it could go. Perhaps we should ask Reggie, since the Wookie hasn't seen it since Sasha.

Dr. Engali's picture

Let me guess:  There will be tanks in the streets, so give us 750 billion now fuckers!

A Nanny Moose's picture

We won't get fooled.... oh...nevermind.

yogibear's picture

Banskters threaten again for another big bonus bailout. TARP II.

THE COIN's picture

Congratulations to Art Cashin for 35 years at UBS. And if Art says that ice cubes have no chance then GLENCORE is an Iceburg.

christiangustafson's picture

Hahahahaha shut it down!

Shut. It. Down. SHUT IT DOWN!

The skin is nice and crispy!

buzzsaw99's picture

one of the things i love about zh is the way they relentlessly parse corporate statements and balance sheets. nice work (as always).

upWising's picture

I think they set the toaster for DARK BROWN or BURNT, and forgot it,  when they put Glencore in.

RadioFlyer's picture
RadioFlyer (not verified) Oct 6, 2015 10:55 AM

News like this should rocket the S&P waaaaay up!

HoserF16's picture

"Rate it Junk and let's Light This Candle!"

WTFRLY's picture

It's that moment when there's been enough talking, time to fight lol

astoriajoe's picture

Nothing inspires confidence like a sources and uses worksheet. 

CHoward's picture

"I'm so totally and completely fucked up you CAN'T downgrade me.  hahahahahaha"

williambanzai7's picture

If you feel the need to explain, you are already junk

Latitude25's picture

True but does the FED have their back or has GS given the thumbs down??

vote_libertarian_party's picture

sooooooo it's bullish right???  


Time to buy buy buy????


That is what the nice men on CNBS keep telling me, and the never mislead me. 

SheepDog-One's picture

'If we're downgraded, then some MOMO speculators could lose big, not to mention our phony baloney job could be at risk!.....oh well tough shit.

Hondo's picture

STupid them and stupid bond mercy

fishwharf's picture

What's Cramer saying about this?

Lmo Mutton's picture

Just don't put this in the headlines or on the front page.

My emotions can not handle another false flag fake shooting hoax to distract the masses.

Icelander's picture

"Never misrepresenting the worst case scenario?"


We are talking about the former 'Marc Rich Inc' Glencore here are we not? Misrepresenting any kind of scenario in favor of the highest bidder IS the business model.

Assume AIG x10, assume Trafigura along the same lines.

Ironically both companies never stopped trading with Iran up until at least 2013 which everybody's favorite mossad agent already had a hand for 30 yrs prior - only him and his boys cashed out well in advance of these happenings.



Blankenstein's picture

Ah yes, Bill Clinton's buddy

"The company was founded as Marc Rich & Co. AG in 1974 by billionaire commodity trader Marc Rich, who was charged with tax evasion and illegal business dealings with Iran in the US, but pardoned by President Bill Clinton in 2001.[15] He was never brought before US courts before his pardoning, therefore there was never a verdict on these charges.""

"In 1983 Rich and partner Pincus Green were indicted on 65 criminal counts, including income tax evasion, wire fraudracketeering, and trading with Iran during the oil embargo (at a time when Iranian revolutionaries were still holding American citizens hostage).[17][7] The charges would have led to a sentence of more than 300 years in prison had Rich been convicted on all counts.[17] The indictment was filed by then-U.S. Federal Prosecutor (and future mayor of New York City) Rudolph Giuliani. At the time it was the biggest tax evasion case in U.S. history.[18]"

 "The pardon became controversial after reports surfaced that Denise Rich had made donations totalling more than one million dollars to the Democratic Party and the William J. Clinton Presidential Center and Park.[1"

"In April 2013, as part of the Offshore leaks tax evasion scandal, financial records were released that showed that Denise Rich in April 2006 had USD 144 million protected from scrutiny by the Cook Islands in the South Pacific in the form of a trust including a Learjet 60 and a 157-foot yacht called the "Lady Joy"

Paracelsus's picture

I am truly sick of this "Burning platform" management theory.

How about the Captain goes down with the ship?

Yup,margin call,and they won't take paper this time.

Seems odd that a company with several thousand (unemployed) employees could

start such a brushfire.Counterparty fun and games..

When the tide goes out you see whose been swimming naked.....