Glencore is proving a real puzzle for banking analysts.
The question is about debt. Glencore says the net debt that it needs to worry about is around $US50 billion (£32 billion). Analysts at Bank of America Merrill Lync, led by Alastair Ryan, aren’t so sure.
They put the total banking exposure to Glencore’s debt at around $US103 billion (£67 billion). It’s all down to opaque guarantees that Glencore can draw down on any time to finance deals, known as letters of credit.
Here’s how that total debt breaks down, the kicker is the last bullet point:
- $US35 billion (£23 billion) in bonds
- $US9 billion (£5.9 billion) in bank loans
- $US8 billion (£5.2 billion) in available revolving borrowing
- $US1 billion (£670 million) secured borrowing
- $US50 billion (£32 billion) in committed letters of credit locked in until 2017
The letters of credit are a type of guarantee from the banks to finance Glencore’s commodities trading deals. The important point, says Bank of America, is that Glencore doesn’t have to put up any collateral for these guarantees, making the banks who backed the deals more sensitive to risk.
The credit lines don’t really show up in normal corporate measures of debt, which is why the total debt mountain is so much bigger than what you see on Glencore’s balance sheet.
It’s not a new point, already noticed by Jim Edwards last month, but it’s worth emphasising because of how much it resembles the events leading up to the 2008 financial crisis.
The guarantees are opaque and its difficult for investors to judge which bank is on the hook for how much of this type of Glencore debt at any particular time. Sounds a little like that toxic mortgage-backed debt from 2008.
Here’s Bank of America (emphasis ours):
Investors may share some of our sense of disbelief that once more the banks are in a position where a significant risk — this time, commodities – has emerged and it is difficult to externally judge with any confidence what exposures are; how risky they are, or whether they are impacted by the level of commodity prices.
Glencore’s debt is an anchor around its neck and huge compared to its mining rivals. It’s the biggest out there even on a net basis, in fact, as this BAML chart shows:
There is one saving grace however, and that’s the size of Glencore’s massive roster of lenders. In a recent deal, the debt obligations were spread out to more than 60 banks.
This means that if something bad does happen, the risk is spread out across the banking system rather than being concentrated in the hands of a few large investment banks like in 2008.
Small comfort, but it might delay the need to restock the tinned food cabinet for little while longer