Over the past month, as a result of the increased focus on Glencore which has resulted in many investors suddenly realizing they knew very little about the company and certainly Glencore’s “black box” trading desk which coupled with the historic crash in its stock price, Glencore has, in some circles, been called not only the Lehman of the commodity-trading world but even gained the far less reputable nickname of Glenron.
But is it deserved? As the following org chart of Glencore shows, the company – at least on the surface – appears to be far “simpler” than Enron was in the days preceding its biggest, for the time, and quite unexpected, bankruptcy.
Glencore org chart:
Compare this to the org chart of just Enron’s Special Purpose Entities as it appears in Appendix D beginning on Page 372 of the infamous Enron whistleblower’s book
So this should be enough to confidence that Glenron, pardon Glencore, is a far more transparent corporation, right? Apparently not.
As the WSJ reports, “some investors have described Glencore’s trading business as a “black box” in which the risks are impossible to value… Brompton Group, a Toronto fund that manages $2.2 billion, doesn’t invest in commodity-trading houses because of the lack of transparency, said Laura Lau, senior vice president specializing in resources. “They are black boxes,” she said. “It’s difficult to know what goes on inside, difficult to project their earnings. Companies like Glencore say, ‘Trust us,’ but trust is not enough of a reason to invest your money.”
The WSJ continues:
Of particular concern, they said, was Glencore’s use of financial instruments such as derivatives to hedge its trading of physical goods against price swings. The company had $9.8 billion in gross derivatives in June 2015, down from $19 billion in such positions at the end of 2014, causing investors to query the company about the swing.
Glencore told investors the number went down so drastically because of changes in market volatility this year, according to people briefed by Glencore. When prices vary significantly, it can increase the value of hedging positions.
Last year, there were extreme price moves, particularly in the crude-oil market, which slid from about $114 a barrel in June to less than $60 a barrel by the end of December.
That response wasn’t satisfying, said Michael Leithead, a bond fund portfolio manager at EFG Asset Management, which managed $12 billion as of the end of March and has invested in Glencore’s debt. He said he wants Glencore to be more open about how its financial derivatives would be affected if banks reduced credit to its trading arm, also known as its marketing business.
“The concern is that if banks cut the amount of credit they were prepared to extend the company, it would have to reduce its hedging or derivatives business and, therefore, that shrinks its ability to do its marketing business altogether,” Mr. Leithead said.
He said he didn’t believe the company was at risk of default, but Glencore could get hit by a credit crunch “at a point in time when it was most damaging to them.”
The good news is that as shown above, at least Glencore’s publicly disclosed org chart does not reveal any potential SPE “black box” to add to investor worries. At least none that we are aware of.
However, the debt issue is certainly a problem, and as we will show shortly in a follow up post, there is very good reason to worry about Glencore’s debt… all $100 billion of it.
