Credit ratings and commodity crisis

The attention on Glencore is palpable. Never in its history have so many negative market moves been heaped upon it.

Source: Bloomberg

Glencore lost 29% in London to close 75% down for the year. Its rumoured reverse takeover of Rio Tinto at the start of the year is now seen as extreme debt risk considering the state of its balance sheet today – a blessing in disguise that the deal wasn’t done.

Glencore raised US$2.5 billion in an equity placement last week. The reactions from the analytical world is that this amount will do little to cover the collapsing thermal coal prices, let alone the rout in industrial metals as taking as a whole. Analysts see thermal coal prices impacting Glencore’s EBITDA by 15% to 18% alone.

What’s more, its trading desk business must be under huge pressure as margin calls on its commodity positions are constantly triggered in this collapsing environment. The impact here is a little more clouded but no doubt taking place.

The credit default swaps (CDS) lit up on Glencore’s woes, jumping 50% to its highest level on record. Comparing BHP’s, Rio’s and Glencore CDS, the risk in commodity producers has been climbing all year on the commodity market slump – but was last night the tipping point? 

The issue for Glencore is its recent announcement on balance sheet management through asset sales. However, deals of this magnitude take considerable time. In ‘market time’, asset sales move at snail’s pace. The speed at which the CDS market is moving, coupled with the fact that commodity markets are wiping huge waves of value off assets means Glencore could see its credit rating at junk status and its asset values quartered or halved by the time deals are finalised. Glencore’s US$50 billion debt issue is a mounting concern, increasing the likelihood of fire sales to meet its balance sheet needs.

The FTSE metal and mining sub-index fell 9.3%, the FTSE materials index fell 7.2%. It will be a brutal trading come the open of the ASX.

Copper dropped through US$5000 a tonne as nickel and aluminium followed the red metal down to be chasing year-to-date lows.

Last night’s trade has a feeling of an all-out short attack; the sustained squeezing of commodities is likely to see several firms pushed to breaking points.

I would be watching the nickel, copper and aluminium firms this morning, with AWC being the stock of choice after parent company Alcoa’s decision to split in two on legacy issues.


New York Fed President Bill Dudley stated in a speech last night that he is concerned about asset prices in the US, particularly on housing over the coming few years. However, in the same speech he basically confirmed that he’s in the December-hike camp too, which counts him out as one of the three to shift their rate hike expectations out to 2016.

AUD was again pushed back below 70 cents as the commodities story played havoc with NOK, CAD and NZD during the European and US sessions.  

Unless the ASX can recover 1.5% by the close of business tomorrow, Q3 2015 will be the worst quarter since Q3 2011 – when the ASX fell 13%. It is currently down 7.64% and with an expected 1.82% decline today yet to be factored in, it’s looking inevitable.

US banking stocks did not escape the rout last night, falling 2.4%, with Citi falling 3% and JP Morgan falling 2.42%. Australian banks will not escape the rout either and questions about corporate lending to mining will begin to raise its head now.

Risk off trading was partly forecasted. This stat emerged from cash markets on Sunday: For the first time in 25 years, cash has lead all other asset classes last week. US$17 billion was added into money markets last week compared to US$3.3 billion being pulled from equities and a miniscule $400 million added to bonds. This is the first time since 1990.

This stat won’t be replicated this week as US, German and UK bond markets were hugely bid last night. US ten-year yield fell seven basis points to 2.09%, Gilts also fell seven basis point to 1.77% and Bunds was down six basis points to 0.58% – the wall of worry is being built back up very quickly.

Ahead of the Australian open, we’re currently calling ASX down 93 points to 5020. It’s currently a dog-eat-dog market.

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