Shares in mining and commodities trading giant Glencore plunged by 30% last Monday. The slump was due to more poor Chinese data and a note from Investec saying Glencore’s equity could be worthless if metals prices stay low. The main worry is the group’s massive debt load of $30bn. Scepticism over its ability to cope with this debt is growing. The price of insuring Glencore’s debt against default has jumped to the highest level since the global crisis in 2009.
On Tuesday, Glencore said it remained “operationally robust” and had access to “strong lines of credit”. Citigroup said the company looked undervalued and should consider going private if the stockmarket failed to value it fairly. The shares bounced but remain around 80% below their 2011 flotation price.
What the commentators said
“These are dangerous times for Glencore,” said Jonathan Guthrie in the FT. It is starting to look vulnerable to a “feedback loop” – a downward spiral whereby rattled customers and suppliers demand safer terms, thus increasing the financial pressure on the group and fuelling the general jitters. It hardly appears to be in imminent danger of bankruptcy, said Helen Thomas and Richard Barley in The Wall Street Journal. A recent share placing and suspending the dividend will help raise $10bn to cut its net debt by a third. Yet investors have fled in droves, no matter how illogical this is.
One major problem, as Jim Armitage pointed out in The Independent, is that “nobody knows when, if, or by how much, demand for Glencore’s products will return”. Its own forecasts have
been too bullish in recent years. There are also recurrent questions about what is happening at its commodities trading division, an “inherently opaque” business. It says its debt-funded positions are all hedged and its balance sheet can cope, but “there are niggling doubts”.
So what next? “One has to admire the chutzpah” Citigroup has displayed with its suggestion that Glencore go private, said Nils Pratley in The Guardian. Investment banks have done extremely well out of it ever since its overpriced floatation. The recent share placing, which Citigroup helped set up at 125p, was just the latest bonanza.
Now Citigroup is lining itself up for more fees from a buyout, and is even floating the idea of another flotation a few years down the track. How absurd. The last thing this overleveraged company needs is “another layer of buyout debt”. Instead, it should be selling some assets “at half-decent prices” to get its debts down.