|
|
Old NEM MB
|
|
||
the market has already withdrawn the company’s investment grade rating; now everyone is waiting for Moody’s Investors Service and Standard & Poor’s to catch up.Continued from page 1 While Glencore’s stock has sold off 75% from its 52-week high of £345.69 per share, what has happened to its debt is more troubling because it affects its all-important financing costs. Its €1.25 billion of notes due March 2025 have fallen to 78 while its £750 million of bonds due March 2025 have dropped to 67, both record lows. Even worse, the price of the company’s credit default swaps have collapsed to CCC-levels. Investors are now demanding upfront payments in addition to the normal annual payments required for 5-year credit default swap contracts, which are only required for distressed companies. At recent levels of 875-900 basis points including the upfront payment, the market has already withdrawn the company’s investment grade rating; now everyone is waiting for Moody’s Investors Service and Standard & Poor’s to catch up. Once that happens, the company will be forced to post additional cash collateral and things could get ugly very quickly. If this sounds familiar, it is because it resembles what happened to insurance giant AIG on a much larger scale in 2008 at the height of the financial crisis. AIG had written hundreds of billions of dollars of credit default swap contracts on subprime mortgage deals. When it lost its investment grade rating and was required to post additional cash collateral for these contracts, it was unable to do so and had to be bailed out by the government. But before that happened, AIG’s credit default swap spreads blew out just like Glencore’s are blowing out now. Glencore doesn’t exist in the vacuum today, just like AIG didn’t exist in a vacuum in 2008. Glencore is an essential link in a networked global financial system. It is an important counterparty to many of the largest financial institutions in the world, who are in turn counterparties to other financial institutions, who are in turn counterparties in endless collateral and counterparty chains that keep the global markets operating. These chains are only as strong as their weakest links. In 2008, their weakest link was AIG until the government stepped up and bailed out the insurer. Then the weakest link became Lehman Brothers, and when the government refused to step up and bail out the brokerage firm, all hell broke loose. Fortunately, Glencore is a lot smaller than Lehman Brothers with a balance sheet of $155 billion compared to Lehman Brothers’ $600 billion in 2008. But $155 billion is still a big mess to clean up. Glencore is connected to a lot of other counterparties who will have to scramble if it collapses. A Glencore bankruptcy will be a disaster not only for commodities markets that are already on the run but for all financial markets that are dependent on the ability of highly leveraged counterparties to meet their obligations. In terms of its importance to already reeling commodity markets, Glencore ships more thermal coal than any other miner in the world, is the largest copper supplier, and is a major player in markets ranging from oil to grain to aluminum. During its 2011 IPO, it disclosed that it controlled 60% of the world’s zinc, 50% of copper and 45% of the lead market. The closest analogy may be Drexel Burnham’s dominance of the junk bond market before it collapsed in 1990. A Glencore ratings downgrade and its consequences is the last thing the commodities markets need right now but appears to be highly likely without some sort of radical change in circumstances. PAGE 2 / 3 Continue |
return to message board, top of board |