Two weeks ago, in a stunning development, Glencore officially folded the towel on not only its global expansion ambitions and its bullish commodity case, but admitted it was far too levered for the current recession in commodity prices. As a result, Glencore CEO Ivan Glasenberg unveiled a $10 billion deleveraging plan in order to prepare for a "doomsday scenario" for commodity prices.
Sure enough, the company's CDS which Zero Hedge had said back in early 2014 with "Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?" was the best way to bet against the Chinese blow up currently in progress, tumbled from a level in the mid-400s to 300 bps on hopes Glencore would be able to successfully delever to a 2x net debt level.
The first crack in these hopes emerged just a few days after the company's deleveraging announcement when Moody's downgraded Glencore Baa2 outlook to negative, despite the proposed equity raise, asset sales and capex mothballing.
In doing so Moody's merely confirmed our skepticism from September 7 when we said this Glencore's action "merely reinforces our thesis and allows all those who missed the initial blow out in GLEN credit default swaps to put the trade on... at levels not seen since about a month ago. Because as a result of today's asset-stripping and equity-raising activity, Glencore is now a that much better levered bet on China's economy in a broad sense, and copper pricing in a narrow one."
Our conclusion from the Monday two weeks ago, when GLEN CDS was trading back down at 300 bps:
"with every passing week that neither China's economy rebound nor copper reverses recent losses, expect GLEN CDS to accelerate its widening once again, and overtake its recent multi-year high level of 445 bps in very short notice."
Fast forward to this morning when not only did Glencore stock drop below 100p for the first time ever as we noted in our overnight wrap, but according to CMA, the shock that the company's deleveraging will not be enough is now shaking the entire capital structure, and, lo and behold, as of moments ago, GLEN CDS just soared by 74 bps to a whopping 464 bps - the widest since January 2012, and hitting our target in just two weeks.
We expect this CDS blowout to continue.
What's worse, if the company is downgraded from investment grade to junk, watch as the "commodity Lehman" scenario for Glencore, which much more than a simple copper miner just happens to be one of the world's biggest commodity trading desks, comes full cricle leading to waterfall collateral liquidations and counterparty freeze-outs as suddenly the world is reminded that there is a vast difference between a real and a rehypothecated commodity, and that all collateral rehypothecation chains are only as strong as the weakest counterparty!
Incidentally, today's Glencore implosion is a far greater risk to the capital markets and the global economy than Volkswagen: a few executive resignations, a few bribes to US Congress, and the scandal will be promptly snuffed.
For Glencore, however, which suddenly the entire world realizes is - as we said in March 2014 - the way to trade China, it may now be too late.