Glencore is not the next Lehman Brothers.
This week, the embattled British mining company has been in the headlines as its stock has crashed and management was forced to come out and say the last thing anybody wants to hear: “Our business remains operationally and financially robust — we have positive cash flow, good liquidity and absolutely no solvency issues.”
Back in 2008, “ample liquidity” is a phrase that was used by analysts to describe Lehman’s financial condition just months before the investment bank filed for bankruptcy. And so anything approaching this language is likely to give investors jitters.
But in a note to clients on Friday, analysts at Deutsche Bank give a concise breakdown of why Glencore may have its struggles, but doesn’t appear to be dealing with anything that warrants characterising the firm as the “next Lehman.”
Here’s DB (emphasis added):
Perhaps the most confusing part of Glencore’s meltdown — shares dropped another 30% on Monday before rebounding — has been the predictions that the miner is the next Lehman Brothers. True, Glencore has a significant trading arm, but other comparisons are weak. Lehman used 11-figure repo transactions to rosy-up its balance sheet; Glencore does not. Lehman was reliant on overnight funding; Glencore is not. A scan across the current constituents of the S&P 500, for example, shows almost 50 instances since September 2008 where stocks experienced a 30 per cent price drop in a single day. These included State Street, Netflix, Time Warner Cable, and Fossil Group. Furthermore, 160 companies have a net debt to equity ratio higher than the 83% Glencore expects this year. Yet the latter has been largely alone in provoking such “Lehman moment” commentary.
The basic outline of how the Lehman meme related to Glencore broke out is because the price of its credit default swaps soared, meaning that for holders of Glencore debt it was more expensive to insure against losses in the event of a default.
And while the firm has said its balance sheet is “pitched for Armageddon,” the company simply has an intimidating amount of debt relative to recent cash flows.
The overarching story, however, isn’t specifically about Glencore.
Investors are generally worried about the situation in global markets and whether its Glencore or the scandal at Volkswagen or a weaker-than-expected US jobs report, there seem to be endless reasons for people to be worried about “things” or “moments.”
The worst of the financial crisis is now about 7 years in the past, but its always worth keeping in mind how scarring this time was and remains for many investors, leavings folks quick to pull the trigger on calling for history repeating itself.
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