As A Shocking $100 Billion In Glencore Debt Emerges, The Next Lehman Has Arrived

Tyler Durden's picture

One week ago, in a valiant attempt to defend the stock price of struggling commodity trading titan Glencore, one of the company's biggest cheerleaders, Sanford Bernstein's analyst Paul Gait (who has a GLEN price target of 450p) appeared on CNBC in what promptly devolved into a great example of just how confused equity analysts are when it comes to analyzing highly complex debt-laden balance sheets.

In the clip below, starting about 2:30 in, CNBC's Brian Sullivan gets into a heated spat with Gait over precisely how much debt Glencore really has, with one saying $45 billion the other claiming it is a whopping $100 billion.

The reason for Gait's confusion is that he simplistically looked at the net debt reported on Glencore's books... just as Ivan Glasenberg intended.

However, since Glencore - like Lehman - is first and foremost a trading operation, one also has to add in all the stated derivative exposure (something we did ten days ago), in addition to all the unfunded liabilities, off balance sheet debt, bank commitments and so forth, to get a true representation of just how big, or rather massive, Glencore's true risk is to its countless counterparties.

Conveniently for the likes of equity analysts such as Gait and countless others who still have GLEN stock at a "buy" rating, Bank of America has done an extensive analysis breaking down Glencore's true gross exposure. Here is the punchline:

We consider different approaches to Glencore’s debt. Credit agencies, such as S&P, start with “normal” net debt, i.e. gross debt less cash and then deduct some share (80% in the case of S&P of “RMIs” – Readily Marketable Inventories. These are considered to be “cash like” inventories (working capital) in the marketing business. At the last results, RMIs were about US$17.7 bn. Giving full credit for RMIs plus a pro-forma for the equity raise and interim dividend we derive a “Glencore Adjusted Net Debt” of c. US$28 bn.


On the other hand, from discussions with our banks team, we believe the banks industry (and ultimately regulators) may look at the number i.e. gross lines available (even if undrawn) + letters of credit with no credit for inventories held. On this basis, we estimate gross exposure (bonds, revolver, secured lending, letters of credit) at c. $100 bn. With bonds at around $36 bn, this would still leave $64 bn to the banks’ account (assuming they don’t own bonds).

Charted, here is why Sullivan and his $100 billion number was spot on, and why Glencore's banks suddenly realize the company has more gross exposure than its has total assets!

BofA lays out the stunning, if only for equity analysts, details:

Over US$100bn in estimated gross exposures to Glencore


We estimate the financial system's exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group's strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus.


Debt broadly spread


GLEN debt breaks down as US$35bn in bonds, US$9bn in bank borrowings, US$8bn in available drawings and US$1bn in  secured borrowing. We then estimate that the group has US$50bn in committed lines against which it can draw letters of credit with which to finance its trading inventories. Based on public filings, we believe that the banks may have limited capacity to reduce even the undrawn portion of these lines until 2017. GLEN have publicly stated its financing is largely locked in - but we believe that this may not provide comfort to risk-averse bank shareholders and supervisors.


Concentration and convexity: potential stress testing ahead


GLEN had an unencumbered asset base of over US$90bn in property, plant, equipment and inventories at the half year. However, for bank investors and regulators, after the crisis, gross nominal exposure is a key metric – including committed facilities. We believe many banks may now be more carefully reviewing their exposure to the commodities complex. Glencore’s banks span the globe, with 60 in a recent financing. Glencore has stated it has locked its financing in for an extended period, but a desire to hedge would be powerful at the banks, as likely that regulators will include commodity and energy exposures in the next stress tests as it is a stated area of focus. These stress tests typically take gross exposures and assume elevated loss-given-default - a potential 5x capital uplift. A system positioned one-way on a credit has historically tended to keep spreads high; implying rising debt costs which are likely to put pressure on credit quality: convexity is alive and well.

Furthermore, as we reported last night, while banks have so far been willing to throw good money after bad, this is about to change:

Bond market spreads imply a non-investment grade rating

The group's bond spreads imply a rating in the single-B range and a rollover cost of funding >200bp above the cost of debt outstanding. We believe banks’ gross margins on their exposures are below the Glencore group’s average funding cost, with drawn financing at spreads around 50bps and undrawn lines materially below this. The cost of hedging exposure is currently over 600bps. Thus, the P&L dynamics for banks are difficult; this implies to us that banks may increase challenge the business model of commodity traders; this implies to us that banks may increase the cost of and reduce the availability of credit to commodity traders, thus challenging their business model.


Bank shareholder pressure on disclosure and exposure


We believe bank shareholders may pressure managements to reduce exposures, if not because of potential loss then at least because of likely capital consumption under stress. In our view, current disclosures by the banks are inadequate to provide clarity. It is not possible to estimate unsecured exposures, nor to understand if individual short term loans may be a part of a long-term irrevocable commitment as in the case of Glencore, based on publicly available disclosure..

Worse, since it is not just Glencore that the banks are exposed to but very likely the rest of the commodity trading space, their gross exposure blows up to a simply stunning number:

For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)

Call it half a trillion dollars in very highly levered exposure to commodities: an asset class that has been crushed in the past year. Which explains BofA's next point:

According to our Credit analyst, Navann Ty, GLEN’s 5y CDS tightened by 85bp yesterday to c. 640 bps. GLENLN CDS is 70bp wider to MTNA (ArcelorMittal), which is rated Ba1/BB. Trying to extrapolate to an implied credit rating is difficult as we don’t think that there are many IG-rated credits trading at the same level. Bottom line - there appears to be a lot of demand for default protection.


All of the above should be well-known to our readers. However, the below exchange between the BofA equity analyst and the company's bank analyst is a must read to gain some further insight on Glencore which is increasingly - and belatedly - seen as the fulcrum entity in what may be the watershed event for any wholesale commodity-trading indudstry collapse, and why the company is, as we first called it, in danger of becoming the commodity sector' "Lehman", a name we first gave Glencore two weeks ago and which appears to have stuck.

What are the similarities that you observe between GLEN and your experience/analysis of other financial companies during the 2008 Global Financial Crisis (GFC)? What is the roadmap for a situation like this to unwind?


Alistair Ryan (AR): One key similarity I see is the financial structure of the company in time and space. Glencore’s highly leveraged financial structure has not been stress tested in its current form through a full cycle. Ultimately it appears that there is a time mismatch between the duration of its funding (short) and the time to realize the value of (some) of its assets (e.g. the industrial assets). The large notional size of its outstanding debts (US$50 bn+) is also unusual. We observed similarly mismatched capital structures during the GFC in consumer finance companies (e.g. Countrywide, Household) & public broker dealers (e.g. LEH).


Can you give some examples of situations that ended well/less badly? What were the actions taken by company managements?


If we look at Banks as a counterpoint through the GFC, they were, in general much more financially resilient. The institutions which came under pressure and/or failed during the GFC had large nominal amounts of short term debt. Take HSBC. HSBC bought “Household”, the largest consumer finance company. We believe because of HSBC’s relatively low leverage, and the fact that they undertook a $17 bn rights issue, they were able to absorb the losses resulting from their ownership of Household.


As an interesting aside, and again speaking to the financing duration mismatch issue, while HSBC took US$22 bn in write-downs related to mark to market losses onstructured credit (sub-prime), in subsequent years, the company has written back around $21 bn of these losses. We might think about a parallel here with the duration mismatch of short term debt funding and some of GLEN’s more marginal industrial/mining assets which might be “out of the money” today but where value could be realized if the assets are held for the longer term.


Can you give some examples of situations that ended badly? What were the pitfalls?


If we consider the example of UBS, during the GFC found itself in the unfortunate situation of needing to do 4 share issuances support its balance sheet and ultimately sold down the assets that were causing the problems. While this combination did fix the problem at that time, it meant that the company didn’t benefit when the value of the distressed assets recovered. (As an aside, we note GLEN’s 9.99% issue may be of concern due to the fact this is the maximum permissible size that can be undertaken without shareholder approval or a prospectus). During the GFC we came to see similarly sized issues as not always adequate.


A key problem then is the combination of short term funding and market moves in the price of assets which could impact the ability to raise funds either through equity raises and / or asset sales.


Speaking in general terms, we think that some management teams may have been overly confident in terms of their ongoing access to funding. They may also have underestimated the severity of market moves and the extent to which these market moves might make their funding structures unsustainable in less liquid environments. Financial companies tended to have few covenants meaning there wasn’t an actionable indication of a problem under the debt terms until it was time to refinance. At Enron, by contrast, the company used funding structures which were dependent on its investment grade rating so that, effectively, 2 days after the company was downgraded to junk, it was “done”.


We do note the dependence of some business models on the feedback loop of market confidence into the cost of debt which can then ultimately impact the viability of the business. For example, if the cost of debt doubled at a commodity trading company, to what extent is the business model impacted?


We also find it interesting that other commodity trading houses such as ADM & Bunge use relatively lower levels of financial leverage.


What are the problems for GLEN with a potential downgrade to ratings 1 notch (BBB-). What about a two notch downgrade to Junk?


As a rough rule of thumb, we’d think about a 1 notch change in rating being equivalent to a 50% change in a bank’s appetite for exposure to a company. With the pressure we’ve seen on Glencore’s yields & CDS we’d expect that some banks could be looking to reduce their exposure to Glencore and would be looking to hedge existing exposures (for example through the CDS market). This would include undrawn lines. With Glencore presently financing at about Libor + 40 bps but the CDS at 800 bps, having a line out to Glencore has significant “negative carry” implications.


Size matters when it comes to the size of debt issuance. Glencore is a large absolute issuer with >$50 bn in outstanding debt in various forms. What this means, in our view, is that the credit may be quite large in many banks’ portfolios already. As such, the ability of some banks/investors to take additional exposure to Glencore may be limited. We consider the example of RBS vs. HSBC. RBS “maxed out” many credit counterparties including in the short-term wholesale market during the GFC.

We also consider the relative size of the markets for investment grade and high yield debt in Europe. Investment grade is about $1.6 trillion. High yield is about US$330 bn. These markets are anticipatory, of course, but to the extent that a large issuer were to be downgraded from IG to junk, we’d expect to see some indigestion as markets adjust to new balances.


What is the feedback loop into the banking system from financial stress at Glencore? What does our experiences of 2008 tell us?


The key feature of financial markets in early 2008 was that it had been a long time since something bad had happened. As such “tail risks” were underpriced and we saw an extended period of “easy money”. More and more leverage came into the financial system at different levels. The layers of leverage meant that once the market turned (and the key one here was the US housing market), and recovery proved difficult.


We also note that, as financial institutions came under pressure in 2008, 2009, several companies released quite general statements reaffirming the strong state of affairs in the business. While these statements may have been true in terms of operations, they didn’t reflect the sea-change in the financing environment and the potential negative marks to which the companies were exposed. As such, we read Glencore’s statement of 29th September 2015 with interest and caution: “Glencore has taken proactive steps to position our company to withstand current commodity market conditions. Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. …”


How might stress tests evolve to include exposure to commodity traders? What is the likely outcome of this?


Bank stress tests are inevitably “topical” i.e. focused on the issues of the day. Take the concept of RMI (“readily marketable inventories”). It hasn’t been tested through an economic cycle. To the extent that we saw a dislocation in commodity markets (say caused by falling commodity prices), this might cause several financial institutions to reexamine commodities / contracts that initially appeared to be cash-like. Then, recovery assumptions might be called into question with the realization value for those commodities as key. To the extent that we saw systemic distress in the GFC with several financial institutions as forced liquidators in a distressed market, liquidity became a real issue and losses were greater than financial models might have suggested. As such, based on our experience, we could hypothesize that a stress test might require an approximate 30/40% haircut on assumed commodity prices.


UK, US & Swiss bank regulators are likely to be focused on this issue in the next round of stress tests (starting in January). In the US we are starting to see the fall-out from the US energy junk-bond situation. In the UK, HSBC and Standard Chartered have big exposures to emerging markets, particularly China. In Switzerland, we believe that both UBS & CS would have exposures to most of the commodity trading houses so Glencore, but also the privately held commodity trading companies such as Trafigura & Gunvor.


How should we think about bank exposure to Glencore and commodity traders in general? Overall, what do you think about this situation?


I’m concerned. The company has cash on hand of around $3 bn at its last results. Yes liquidity is $10 bn including credit lines [JF: latest from company is c. $13 bn post the rights issue]. However, to the extent the company chooses to fully draw those credit lines, a scenario that could emerge is that of this being a stepping stone to lines potentially not being renewed.


If we look at the risks on counterparties, we think that UBS might not be in a position to “take” a $1 bn loss on funds outstanding to Glencore, if such losses were required. CS might not be in a position to “take” a $1 bn loss on funds outstanding to Glencore, if such losses were required. If we think about it from a game theory point of view, there is the danger of a “rush for the exit” in terms of bank exposure to GLEN. As such, credit departments must, we believe, be thinking about how others in the market will consider the risk.


Bottom line, given that CDS in the range of 600-800 and yields on some bonds are now 7% plus, we believe it seems unlikely that a financial institution would look to actively increase its exposure to Glencore, and potentially, to the wider commodity trading space. This scenario would suggest that, while a liquidity squeeze for the wider space may not be imminent, it cannot be ruled out over the next 12-18 months. Again, we are thinking about how risk officers will be planning for the next round of stress tests. To us, part of the latter may mean reducing exposure to commodity traders. We acknowledge that some relationship banks would likely continue to “back” the relationship but whether this will be the norm for the c. 70 banks with whom Glencore has a relationship is uncertain.

Finally, here is BofA's punchline:

  1. Comparisons are being made with some financially leveraged companies during the 2008 Global Financial Crisis (GFC).
  2. If credit is downgraded, banks could lower their exposure to Glencore both in terms of RCFs & LCs.
  3. The high yield market is small and, our credit strategist thinks we might initially see temporary dislocations in a scenario in which GLEN were downgraded to junk.
  4. Bank stress tests could start to include commodity trader distress. This could lead to less availability and more expensive bank funding of traders.

And just like that not only is Glencore confirmed to be systemically important (something we knew when we exposed an "academic" hack's paid report to guarantee that commodity traders were not a systemic risk, confirming they are preicsely that) but suddenly - now that this warning is "out there" and even the most clueless credit, and equity, analyst who is stuck holding billions in losses to GLEN will have no excuse to say they "had no idea" - the negative convexity of bank exposure means that all those very banks which have $100 billion in exposure to the giant commodity trading company will quietly do their best to hedge their exposure, ostensbilty by buying default protection adding even more stress to Glencore's "shadow" funding channels, in the process unleashing the very same chain of events that ultimately led to Lehman's downfall.

*  *  *

It appears the credit markets are well aware of the systemic risks that Glencore poses...

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smartmil's picture

As for me when it finally becomes apparent that we have indeed lost our way, that mark to infinity, non-gaap numbers being included in any report to the SEC wasn’t such a good idea, and all the financial “innovations” are nothing but tricks to stretch a gnat’s ass of collateral over a rain-barrel, I predict a mad crash to real “price discovery” with Gold and Silver coming out the winner in a bull market unlike anything that has occurred before in financial history. Also you must know that best Kidkraft Toys you may find on

Tonald J Drump's picture

that's a yuge amount of debt !

Oh regional Indian's picture

Great handle and picture Tonald! Thanks for the laugh.

Banks can save anyone, well proven.

Glencore will be an issue if it is MEANT to be the issue...

Other wise, it'll be printabillion again...

Captain Debtcrash's picture
Captain Debtcrash (not verified) Oh regional Indian Oct 7, 2015 10:41 AM

Smells like a critical mass default to me.

38BWD22's picture



Why own a turkey like Glencore?  Or any other miner (at least now).

Gold.  Just the shiny yellow physical stuff.  No counterparty risk.

Platinum is OK too if you are an optimist.

NoDebt's picture

They're a lot more "trading house" than "miner".

AIG was a nice, safe, conservatively run insurance company making good money until one tiny division of about 15 people selling CDSs sank the whole company.

38BWD22's picture



10-4, thanks for clarifying.  Trading houses blowup more spectacularly.

Still, miners are riskier than their products now.

The_Virginian's picture

Does this mean we'll be hearing "Worst since Glencore" every day in 2021? 

J Jason Djfmam's picture

"Clearly, nobody could have seen this coming."

OrangeJews's picture
OrangeJews (not verified) J Jason Djfmam Oct 7, 2015 12:57 PM

So is Cramer telling us to buy Glencore?

Slarti Bartfast's picture

Is Gartner telling us to buy Glencore? 

Nenad's picture

Obama will not finish his second term! Banned independent documentary reveals the truth. This will scare millions! Current Events Linked to Ancient Biblical Prophecy!

Manthong's picture

..a couple hundred billion?

..gimme’ a break..  it’s not like it is anything more than Monopoly money

If you don’t do trillions or quadrillions (I have a yen for big numbers) ,,, go home.

Electrons..  1’s and 0’s…..   let the fools eat it.

ZerOhead's picture

$100B was only a month or so of QE back in the day so this will only bring the House of Cards down if they want it to bring the House of Cards down...

nevadan's picture

Over US$100bn in estimated gross exposures to Glencore


We estimate the financial system's exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group's strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus.

Shades of LTCM.

Victorio's picture

$100bn, is that a lot of money?

nevadan's picture

It is if the market goes no bid and you have to sell.


gammab0y's picture

I disagree with this whole analysis, at least at it applies to Glencore's health.  

They are conflating existing debt with untapped credit lines.  Typically, you give a bit of a kudos to a company that has locked in a huge reservoir of cheap, available credit ,but in this article by adding everything together, they are punishing Glencore for just that.   If memory serves me right, Glencore doesn't need to refinance anything until 2017, so with their reservoir of available and locked bank lines, what's the short-term crisis?

I sort of understand adding the numbers together, but only from the perspective of a bank.   But the focus of the story then should be about the banks and not this frankly ridiculous Lehman=Glencore meme.   Glencore and the rest of the commodity traders do not have nearly the funding fragility that Lehman had.

As for the banks, yes, the banks are upside down and come 2017, I'm sure they will be far less generous in any refinancing.  But if we get to 2017 and the economy is stil in the doldrums, the banks are going to be upside down on a lot of credits besides just commodity traders.  There is a lot of "high yield" that has been written at anything but high yields over the last couple of years, and in any kind of recession, they will all become problematic together.

Finally, this whole sudden awareness that commodity traders are risky is a bit silly.  The Trafis, Vitols, and Glencores of the world have made a fortune arbing the world's commodities.  They are good at it, and even with the occasional blow-up, very profitable.  Commodity trading is not the problem for Glencore.  It is the transition from commodity trader to asset owner, mostly mines, and mostly through the XStrata merger.  If you want to look at it that way, then by all means, call Glencore that next ANR or Patriot, where a long, slow painful death is a possibility, but the comparison to Lehman is daft.

ZerOhead's picture

Very interesting observations.

If Glencore is politically well connected then the 2017 timeline may give some indication as to when they expect the ongoing commodity collapse to be reversed by a hyperinflationary global monetary collapse.

Always tough to figure out who the players in the know wearing swim suits are until after the tsunami goes out...

Mentaliusanything's picture

That's not the way it works. All it takes is a bank who has some security over Glencore to ask for immeadiate repayment and the show is over. Every loan in the fine print say so. That is why you go broke slowly then all of a sudden.

Your last sentence is correct but really  "Inter alia"

KnuckleDragger-X's picture

They decided that their shit was odor free and they were the 'smart' people. they are finding out just how fucked up the system really is, but I just wonder how many more Glencores are out there that we don't know about...yet.....

fockewulf190's picture

Yet another Black Swan enters the flock.  It´s going to be a common sight seeing bricks in toilets in the near future.

RaceToTheBottom's picture

The most important thing to know is who are the smartest guys in the room?.

Then you are safe.....


August's picture

...about 15 people selling CDSs sank the whole company.

And those 15 guys never even told AIG's Board of Directors what they were doing!

(if the spokesman for Richard Goldbrajch... er, "Holbrooke", is to be believed.

Deathrips's picture

WTI going to 20s. Washout.



Deathrips's picture

If theres WW3 im not worried about my options.

Most probable that iraq and iran and syria come on strong production as soon as russia wipes the mossad off the chessboard.



KJWqonfo7's picture

It will go to 120 before it goes to 20.

Doesn't matter how many people have to die to make it happen.



NoDebt's picture

I always thought Brian Sullivan was kind of a bag of hammers.  I might have to reevaluate.  Then again, all he really had to do was add a column of numbers and stick to his guns after that, which, admittedly, he did.

prefan4200's picture

Your first thought is the right one, he IS a bag of hammers.  Someone else (smarter) gave him that info and prepped him and he just stuck by it.  He's just not that bright.

Bokkenrijder's picture

Does the Jap chick give blowjobs to Ivan Glasenberg? Amazing how aggressively she cut off her co-host in order to prevent any 'uncomfortable' news. What a media propaganda whore!

Blankenstein's picture

Can't let any negative news come out when a Rothchild is involved.


"A close friend is banking heir Nat Rothschild, who invested millions in Glencore when it was floated. Other friends include the ubiquitous Russian oligarch Oleg Deripaska"

Read more: 
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NoPension's picture

$$$Billions$$$$ are thrown around now like $20's.

It was not long ago those types of numbers were used to describe soveirgn debt. Now, if your company in not reporting or rates in the 10's of billions, you're not worth a look. Wow!

VinceFostersGhost's picture




When do the Ebay auctions start?


Came that close to getting a Lehman hockey puck.

Bangin7GramRocks's picture

100 B ain't no thing but a chicken wing now! Grandma can conjure that up in between her stories and before Jeopardy. She will even have time to do some gardening. Frankie Says Relax.

Tinky's picture

If you were to audition for a bit part in the next Tarantino flick, I'm starting to think that you might actually have a shot.

Argenta's picture

I snagged two Lehman orange pens off eBay back in the day.  A constant reminder of "too big to fail"...


Never One Roach's picture

I sold my Countrywide pen that was actually used by Mozillo thru Ebay. There's a buyer and collector [and seller] for everything these days. Even Kardashian's pre-owned, month-old G-string can go for big dollas.

oddjob's picture

Seems more like a BioHazzard than a collectible.

novelator's picture
novelator (not verified) oddjob Oct 7, 2015 2:35 PM

That's why it ships in a Sharp's container.

August's picture

Bought one of Madonna's old Pap smears on Ebay for $500. It's yours for only $2,500... if you buy by midnight tonight.

Once she dies, the sky's the limit!  They won't be makin' any more!

MaxMax's picture

Have you noticed that pretty much all the financial institutions eventually fail?  And the ones that haven't failed have been bailed out or acquired by another when they got too weak. 

Hippocratic Oaf's picture

Mark to market you cockksuckers.

Start the fire, lets get this show on the road!

44MagnumPrepper's picture

nopat works for Glencore and has assured me everything is okay.

abyssinian's picture

crack head Melissa Lee sure knows how to kill TV ratings and focus on cheerleading.  "hey hey, let's not get tot he bottom of his lies Michael, let's like tell people the truth and just go with this scams lies, let's just say they have a surplus and stop debating"