Glencore on ropes, shares fall 30%, market pricing debt default at odds-on

Here’s another good reason for South Africans to sit up and take notice about the probable impact once their country’s debt drops below “investment grade”. Global mining group Glencore, run by a South African and whose shares are listed on the Johannesburg Stock Exchange, is being put through the wringer after its debt was dropped to “junk” status. The share price plunged 30% yesterday and the slide has continued in Hong Kong this morning. The pricing on Glencore’s credit instruments now translates into an odds-on bet the company will default on debt. Investment markets aren’t buying Glencore’s turnaround strategy. CEO Ivan Glasenberg and his supporters will be hoping their plans work out and this is just the darkness before the dawn. But right now it’s very dark indeed. – Alec Hogg 

Glencore CEO Ivan Glasenberg smiles as he leaves after the company's annual shareholder meeting in the Swiss town of Zug in this May 9, 2012 file photo. Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low on Monday over concerns it is not doing enough to cut its debt to withstand a prolonged fall in global metals prices.About 3.5 billion pounds ($5.33 billion) in market value was wiped off the Swiss-based firm, whose $10 billion share offering in 2011 turned its managers into billionaire shareholders but left it saddled with debt - a growing problem as commodity prices fell. REUTERS/Arnd Wiegmann/Files
Glencore CEO Ivan Glasenberg smiles as he leaves after the company’s annual shareholder meeting in the Swiss town of Zug in this May 9, 2012 file photo. Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low on Monday over concerns it is not doing enough to cut its debt to withstand a prolonged fall in global metals prices.About 3.5 billion pounds ($5.33 billion) in market value was wiped off the Swiss-based firm, whose $10 billion share offering in 2011 turned its managers into billionaire shareholders but left it saddled with debt – a growing problem as commodity prices fell. REUTERS/Arnd Wiegmann/Files

by Cordell Eddings and Sally Bakewell

(Bloomberg) — Credit markets are viewing Glencore Plc as if it’s already junk.

The Swiss company wrestling with a $30 billion debt load watched its bonds plunge below investment-grade levels as credit-default swaps gave it a better than 50 percent chance of default on Monday after Investec Plc said there was little value for shareholders should low raw-material prices persist. Derivatives traders were even demanding upfront payments for the first time since 2009.

This comes after Glencore over recent weeks announced a raft of measures to shore up its balance sheet, including a pledge to cut borrowings by about a third, as China’s economic slowdown hurts demand for raw materials and sends prices slumping.

Read also: Glencore CEO Glasenberg: Impossible to read China or bottom for commodities

“It’s a pure fear trade,” said Tom Voorhees, a corporate bond-trader at Brean Capital LLC in New York. Investment-grade credit investors “have less tolerance for loss,” which is exacerbating selling and price declines, he said.

Glencore is striving to protect investment-grade credit ratings as it seeks an escape from a painful squeeze. For as its debt load has ballooned, China — the engine that drove prices for everything from copper to coal to oil– is the weakest it’s been in a quarter century. And as the nation’s leaders transition the world’s second-largest economy to services and away from industry, hopes for a commodities revival fade.

‘Skittish’ Sentiment

Glencore’s price slump reflects “very skittish investment sentiment” as well as weak global growth and China concern, said Lyndon Man, a London-based fund manager at Invesco Ltd., which oversees about $780 billion. A weak balance sheet is also making the company an “easy target for speculation” even after the debt-reduction plan, he said.

Both Standard & Poor’s and Moody’s Investors Service, which rate Glencore two levels from junk, have said this month they may downgrade the company.

Traders were demanding about 14 percent upfront to protect against a Glencore default for five years, CMA prices show. That’s the equivalent of 8.5 percentage points annually, the highest level since April 2009.

Glencore’s 1.25 billion euros ($1.4 billion) of 1.25 percent bonds maturing March 2021 fell 12 cents on the euro to 69 cents, the lowest since the securities were issued in March, according to data compiled by Bloomberg. The yield was 8.3 percent, which surpassed the 5.66 percent average demanded by investors to hold sub-investment grade euro-denominated bonds, according to Bank of America Merrill Lynch index data.

‘Calm Nerves’

“Glencore management need to make an official announcement to calm nerves,” said Darren Reece, a money manager at GAM Holdings AG in London, which oversees $127 billion.

Glencore has sold new stock and scrapped its dividend as part of a $10 billion debt-reduction program announced three weeks ago. It has also hired Citigroup Inc. and Credit Suisse Group AG to sell a minority stake in its agricultural business, a person familiar with the situation said Friday.

With help from the market, Glencore’s efforts may be enough to cut debt and revive its bonds, said Aengus McMahon, the London-based head of European high-yield research at ING Bank NV.

Read also: Glencore raises $2.5bn in new rights issue, despite record low share price

“They need to execute their plan, and if that is executed well then these moves look over done,” he said. “It all depends on what happens to copper prices in the next 12 months.”

Answering the big questions around Glencore:

by Kevin Crowley and Agnieszka de Sousa

(Bloomberg) — Four years ago, Glencore Plc held an initial public offering that made several of its employees billionaires. Now, with the so-called commodities supercycle an increasingly distant memory, the trading company finds itself squeezed by lower metals and energy prices and concern about Chinese growth.

The shares plunged 29 percent Monday while the cost of insuring the Swiss company’s bonds against the risk of default soared. A $10 billion debt-reduction plan announced earlier this month hasn’t done enough to allay concern about the risks posed by a debt pile that mushroomed following years of acquisitions.

It’s a big come-down for the world’s largest publicly listed commodity trader, which handles and ships billions of dollars of raw materials to and from almost every corner of the globe, and is a top producer of many key metals. Even so, Glencore’s woes aren’t likely to pose the type of systemic risk that would trigger significant adverse effects on the real economy, said Craig Pirrong, a professor at the University of Houston who has studied the issue.

What is Glencore?

Already an established commodity trader, since acquiring Xstrata Plc for $29 billion in 2013, Glencore has also been the second-biggest copper refiner, the top producer of zinc outside China and one of the biggest suppliers of nickel. The company also produces lead, cobalt and aluminum, and is one of the largest traders of oil and wheat. Its shares began trading in London and Hong Kong in 2011.

Why wouldn’t Glencore’s woes affect the economy?

“Glencore is big for a commodities trader, is not that big compared to a major bank,” said Pirrong, who wrote a 2012 report titled “Not Too Big to Fail” about commodity traders. “Glencore is really more a mining firm than a commodities trading firm. And big firms can go bankrupt, which causes pain to their creditors but typically no creditor is going to be so exposed that their financial viability is going to be threatened. The contagion effects are limited.”

What are the company’s origins?

Belgium-born trader Marc Rich founded Marc Rich & Co. in 1974 in Switzerland, where he avoided extradition to the U.S. on charges of tax evasion and doing illegal oil deals with Iran. Rich, who was credited with inventing the modern oil market, remained a fugitive for decades before he was pardoned by Bill Clinton on the president’s last day in office in 2001. His company was transformed into Glencore in 1993 through a buyout by a management team that included current CEO Ivan Glasenberg.

Who is Ivan Glasenberg?

Since becoming CEO in 2002, the 58-year-old helped transform the company from a commodity-trading house into a diversified mining group. He’s the second-biggest shareholder with an 8.4 percent stake. His fortune, which was estimated at $7.3 billion in July 2014, fell to $1.4 billion at the close of trading Monday, according to the Bloomberg Billionaire Index.

How does Glencore make money?

Of its $4.6 billion in first-half 2015 earnings before interest, taxes, depreciation and amortization, 74 percent came from mining, energy and agriculture, and 26 percent from trading.

How have shareholders fared?

The stock has lost 87 percent on a total-return basis since it began trading in May 2011, compared with a 65 percent decline in the MSCI World Metals & Mining Index. Most of the losses have come in 2015. The stock is the worst performer on the U.K. FTSE 100 Index this year, falling 77 percent.

What’s the trading risk?

An erosion of Glencore’s credit rating could impact its trading. While futures involve an exchange clearinghouse that guarantees trades, counterparties in other transactions may demand Glencore add collateral to back contracts if its credit rating deteriorates. However, because Glencore is a producer of raw materials, many of its positions may be designed to provide protection from a drop in prices. If so, they probably increased in value during the slump. Glencore’s impact on the rest of the market may not be big. Over-the-counter commodity swaps contracts had a notional value of $1.9 trillion at the end of 2014.

What else is at risk?

Equity holders may be left with little value unless commodity prices recover, Investec Plc said in a report Monday. And of course, any bondholders stand to lose out too. Beyond that, any analysis of whether problems at the trader might create systemic risk probably would focus on financial companies that are trading partners. The failure of big commodity traders is “not analogous to Lehman in any way,” Pirrong said. “Glencore or these other companies are moving not because there is a contagion but because they are all affected by the same bad fundamentals.”

Read also: BHP, Glencore share prices test new lows as commodities rout deepens

How much debt does Glencore have?

As of June 30, the company reported net debt of $29.55 billion.

Who regulates the company?

There’s no national or supranational entity regulating commodity-trading companies, according to Pirrong. Still, some of Glencore’s activities are subject to supervision by regulators. For instance, its American futures trading falls under the jurisdiction of the U.S. Commodity and Futures Trading Commission. The Financial Conduct Authority provides the same role in the U.K.

Who are Glencore’s competitors?

Competitors include energy traders Trafigura Beheer BV, Noble Group Ltd., Vitol SA; copper producers including Chile’s Codelco, Freeport-McMoRan Inc., BHP Billiton Plc and Rio Tinto Plc; zinc suppliers like Korea Zinc Co., Nyrstar NV, and Brazil’s Votorantim Industrial SA.