While the biggest bankruptcy story of the day is this morning's chapter 11 filing by Arch Coal, one which would trim $4.5 billion in debt from its balance sheet while handing over the bulk of the post-reorg company to its first-lien holders as part of the proposed debt-for-equity exchange, the reality is that the Arch default was widely anticipated by the market.
However, another far less noted and perhaps far more significant bankruptcy filing was that of Sherwin Alumina Co., a U.S. unit of commodity trading giant Glencore PLC, whose troubles have been extensively detailed on these pages. The stated reason for this far more troubling chapter 11 was "challenging market conditions" which is one way to describe an industry in which just one remaining U.S. smelter will be left in operation after Alcoa shut down its Warrick Country smelting ops last week.
A spokesman for Glencore, which owns the entire business, said the commodities producer and trader is "supportive of the restructuring process undertaken by Sherwin and is hopeful of an outcome that will allow for the continued operation of the Sherwin facility."
Sherwin said it will continue to operate while in bankruptcy and that Corpus Christi Alumina, another unit of Glencore, has offered to purchase almost all of Sherwin's assets for an undisclosed sum.
This peculiar action between two subsidiaries of Glencore refocused the market's attention on the one company which in September was among the hardest hit in the post-China devaluation rout, and the immediate result was that while Glencore stock plunged and is once again approaching all time lows, a more ominous development was that GLEN's CDS spiked to as much as 950 basis points, the highest since April 2009 and suggesting far more pain is in store for the commodity trading giant.
The story of Glencore is well-known to regular readers, but here is the summary from Bloomberg, for those unfamiliar:
Slumping commodity prices have battered Glencore, prompting it to scrap a dividend payment, sell new shares and outline asset sales as it seeks to curb debt to maintain its investment-grade rating. Copper dropped to a six-year low amid a rout in metals as muted Chinese inflation increased concern that demand from the world’s largest buyer of raw materials will slow.
“CDS levels are driven by commodity prices and in the case of Glencore, especially copper,” said Max Mihm, a Frankfurt-based portfolio manager at Union Investment, which holds Glencore bonds among assets totaling about $271 billion. “If prices fall further and stay low Glencore will need to do more to protect its IG ratings.”
A Glencore spokesman declined to comment on its credit default swaps.
Copper for delivery in three months fell 1.9 percent to $4,399 a metric ton as of 4:46 p.m. on the London Metal Exchange, the lowest since April 2009. The Bloomberg World Mining Index of 80 equities fell for a fourth day to the lowest since June 2004.
Furthermore, while we have been following with great interest the plight of Glencore's oriental cousin, Asia's largest commodity trader, Noble Group, in the aftermath of its junking by both rating agencies (most recently in "Noble Group's "Margin Call" Part II: The Enron Moment") a move which will may unleash terminal collateral calls, something duly reflected in its all time low stock price, we have yet to see a comparably downgrade to junk status for Glencore.
Somehow we doubt that after today's bankruptcy of Sherwin Alumina we will have much longer to wait, which means that the CDS of Glencore, already trading just south of 1000 bps, or 15-17 points upfront, are about to take another quantum leap wider pushing Glencore's default even higher. Incidentally, as of right now, the market predicts a 55% probability of Glencore default over the next 5 years.
Compare this to the 181 bps GLEN CDS was trading at when we first revealed it as the "The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch" in March 2014, a time when instead of coming up with original ideas the "smart money" was instead piling into Valeant which is already down about 15% in 2016 alone...