Friday, March 14, 2014

Trading the Chinese Credit/Commodity Crunch With Glencore Collateralized Default Swaps

From ZeroHedge:
Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?
"The best way to define the mood in the market right now is panic," warns one commodity broker, adding that "everyone understands why we are going down, but nobody can tell where the bottom is." As the WSJ notes, the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal - exacerbated by the vicious cycle of credit-collateral-contraction. So what is the cheapest way to play continued stress (with potentially limited downside)? The diversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights...
Is Glencore the most exposed to a decline in commodities prices? – A trading giant rated BBB with over $55bn of debt and heavy exposure to commodities.
A downgrade to below investment grade would be catastrophic to Glencore’s trading business.
Company’s 12/31/2013 presentation says a 10% decline in Copper Prices would reduce EBIT By $1.2bn...

As of 12/31/13, Glencore had $55.185 billion in Gross Debt
By 3/12/2014, Copper has declined to a 44 month low, 12% decline in YTD 2014
Glencore reports Net Debt of $35.882bn, which is $55.2bn of gross debt minus $2bn of cash minus $16.4bn of "Readily Marketable Inventories." Nowhere do they define what’s included in the Readily Marketable Inventories and whether or not the RMIs are hedged.  The firm is still highly levered for investment grade even if RMIs can be converted into cash at stated value....MORE