Glencore CDS Rout Continues, Curve Remains Inverted Even As Stock Rebounds On Sellside "Defense"

After its biggest daily crash in history on concerns Glencore's (or Glenron as it has been called recently) equity is worthless unless commodities stage a dramatic rebound (a crash which together with the plunge in Volkswagen has cost the Qatar sovereign wealth fund $12 billion in paper losses), the company's awestruck sellside following - the vast bulk of which has been defeneding a "buy" rating ever through the company's historic collapse, has decided to give it one last push, and double down all-in on their ridiculous, and massively money-losing "buy" recos.

First, it was Bernstein's Paul Gait (with a laughable price target of 450p - the highest on the street -or about 380p higher than the current price), which said it sees real economic value in both of Glencore’s businesses - clearly, hence the price target. The problem is it never saw the catalyst that slammed the stock to record lows.  Bernstein continues that its assessment of commodity trading, a "fundamental building block of the global economy," as having suddenly lost fundamental value “seems absurd."

What Bernstein is unable to grasp is that "commodity trading" has not lost value at all, but it is Glencore's commodity trading that now faces a binary future, one where a downgrade from Investment Grade does in fact lose all value of Glencore's trading division, as the company simply can not continue to operate under its current liquidity regime with a "Junk" rating.

More from Bernstein, which also says that the market "appears to have an endless appetite to price the instantaneous present as if it were a fair reflection of everlasting reality,” which is “less than staggering in its intellectual profundity."

Because when you've been epically wrong, surely your best bet is to go ad hominem with the entire market.

Bernstein's bottom line: insolvency concerns are unwarraned even if the industrial assets continue to produce spot Ebitda margins at spot prices, and the trading unit contributes nothing, Bernstein still sees 93p of value.

Let's hope that Bernstein isn't as wrong about this as it has been about everything else involving Glencore. Because should the rout resume, we are confident Paul Gait will soon be looking for another job: perhaps the "solid" Glencore trading floor can hire him.

Then it was Citigroup's turn (which has a far more "reasonable" price target of 170p) with a note titled "Bottomless? - we don’t think so" in which the bank says "we believe there is potential upside to the $2bn target outlined from asset sales, including streaming and minority stake sale to strategic investor(s) in the agricultural business. The level of interest is likely to be high in both situations. We also think the group is not limited to just selling a minority stake and if the need be, the entire agricultural marketing business could be sold, which we value at ~$10.5bn."

And if all that fails, Citi's fall back is that the company's management will just take it private:

We believe that in the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly, with a potential float of just the industrial business occuring further down the track.

There is one problem with that: Glencore's public debt, which unfortunately refuses to cooperate with the equity rebound, and at last check the CDS continues to be traded points upfront, with the 5Year CDS trading just over 900bps on a running spread basis.

Worse, the CDS curve continues to remain inverted:

In short: convincing equity that company is viable is one thing, and the company sure is trying:


... With the stock rebounding some 16% as of last check on hopes the worst may be behind us.

However, convincing the far more skeptical bond market, which is desperately trying to figure out the counterparty risk, will be far more difficult. As Reuters notes, "Glencore's €1.25bn April 2018 bonds dropped over 12 points to a cash price bid of under 78.00, before bouncing back a point, leaving the yield at 15.3%."

Good luck.