Nerves of steel: Glencore's brave call in battle with short-sellers

Fri Mar 18, 2016 9:51am EDT
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By Gareth Gore

March 18 (IFR) - Markets were panicking about Glencore on the morning of January 14. A rout in metals, agricultural and energy prices had hit the commodity trading company hard, making it a target for short-sellers who were betting on its collapse. Glencore shares started trading that morning at 70.83p, their lowest open ever and down almost 90% from its IPO less than five years earlier. Its bonds with just a year to maturity were yielding over 10%, an unmistakeable sign of stress, while the cost of five-year default protection was quoted above 1,000bp for the first time since October 2008.

"People were starting to see ghosts," said one banker who has closely worked with the company for a decade. "They thought Glencore was going bankrupt."

From the outside, there looked to be plenty of reason to worry. Lured by surging commodity prices and growing demand from China, the company had gorged on cheap debt in the late 2000s, doubling its borrowings at a time when much of the corporate world was cutting back. A merger with miner Xstrata in 2013, just as commodity prices were peaking, left the company highly leveraged and owing more than US$55bn to its creditors. As commodity prices took another leg down last summer, the storm clouds growing over the company became too large to ignore. Glencore hastily put together a US$10.2bn debt reduction plan, but that did little to settle investor nerves. Short-sellers were circling, investors were fleeing. Many thought Glencore's days were numbered.

But Ivan Glasenberg was not overly concerned. Glencore's chief executive had first made a name for himself as a champion speed-walker, a sport whose main rule is to always keep one foot on the ground. While Glencore's debt looked worrying from the outside, Glasenberg remained rooted, confident the company had the full backing of its banks. Glencore was, to put it mildly, one of their most important clients. In a good year it generated hundreds of millions in revenue for the banks through interest on its loans, bond underwriting fees, advisory work, trading and letters of credit. Glasenberg knew they would stand behind the company during its time of need: he had an ace up his sleeve, and he was ready to use it.

A consortium of banks had extended an US$8.45bn one-year loan to Glencore the previous May, and, although it still had months until maturity, uncertainty around whether or not the company might be able to refinance that debt was helping feed the fear that the short-sellers were preying on. After some internal debate, and having spoken to some of its most senior lenders, Glencore decided it needed to take that uncertainty off the table. So on the morning of January 14, just as market confidence in the company was reaching its lowest ebb, Glasenberg made his move. Glencore's finance department contacted the banks and asked them to increase their lending commitments to the company at its time of need.

Many bankers were caught off guard. Not only was the market climate extremely volatile at that moment, Glencore had not been expected to refinance the one-year loan for a couple more months. And the company did not hesitate to tighten the screws: it essentially gave the banks an ultimatum, telling those that had lent it US$150m each the previous year that they now had to commit US$250m to get in on the deal.

It was the kind of master stroke - brash, confident, outrageous to some and ultimately successful - that had long defined the company. Glasenberg and his finance team knew the banks would have little choice but to say yes - and say yes they did. Glencore shares rallied more than 9% on the day that the refinancing was announced. Within four weeks, the commodity trader had 37 banks on board - more than on the previous loan, which had come during the relative calm of the previous May - and more money committed than it was looking to borrow. With the overhang of the loan out the way, Glencore's share price doubled over the following few weeks. The company had the full and unquestioned backing of its banks, and now everyone in the market could see so.

"It's a testament to the strength of our banking relationships that we had the confidence to launch the refinancing early," Glencore's chief financial officer, Steve Kalmin, told IFR in a rare press interview. "The vast majority of banks have known our business for decades, with some relationships going back 40 years. They're not only your capital providers - they're your cash managers, LC providers, foreign exchange counterparts, risk management enablers, et cetera. They have day-to-day visibility into your business and access to management, which provides very high levels of comfort."   Continued...