Banks are 'locked in' to Glencore's $100 billion debt mountain
The question is about debt. Glencore says the net debt it needs to worry about is around $50 billion (£32 billion). Analysts at Bank of America Merrill Lynch, led by Alastair Ryan, aren't so sure.
They put the total banking exposure to Glencore's debt at around $103 billion (£67 billion). It's all down to opaque guarantees that Glencore can access a pool of money, known as letters of credit, at any time to finance deals.
Here's how that total debt breaks down; the kicker is the last bullet point:
- $35 billion (£23 billion) in bonds
- $9 billion (£5.9 billion) in bank loans
- $8 billion (£5.2 billion) in available revolving borrowing
- $1 billion (£670 million) secured borrowing
- $50 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, Bank of America says, is that Glencore doesn't have to put up any collateral for these guarantees, making the banks that 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 Business Insider's 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 it's 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 with that of 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 as in 2008.
Small comfort, but it might delay the need to restock the tinned food cabinet for little while longer.