Month: February 2016

The one catalyst many Glencore bears have been eagerly waiting for, is the downgrade of the troubled independent energy trader to junk status, a catalyst which as previously explained, will likely spring various, heretofore unknown margin calls and collateral “waterfalls” a la AIG.

Overnight, one of the two rating agencies, Standard and Poors, came one step closer to that fateful moment when it downgraded Glencore, however it decided to throw the company one last lifeline by keeping it at the very lowest investment grade rating, and instead of cutting it from BBB to single B or CCC where its CDS and bond yield implies the company should be trading, it kept it a BBB-.

This is what it said:

Glencore PLC Ratings Lowered To ‘BBB-/A-3’ On Price And Sector Review; Outlook Stable

• Standard & Poor’s Ratings Services has recently lowered its price  assumptions for copper and other metals, reflecting the very challenging  market outlook and the increased uncertainty about demand. 
• These heightened operating risks, reported EBITDA declines, and increased volatility of earnings lead us to a more cautious assessment of global mining company Glencore PLC and its financial leverage.
• We are therefore lowering our long- and short-term corporate credit ratings on Glencore to ‘BBB-/A-3’ from ‘BBB/A-2’.
• The outlook is stable as we believe Glencore’s meaningful continuing free cash generation, strong liquidity, and active balance sheet deleveraging should mitigate downside risk.

Standard & Poor’s Ratings Services  today said it has lowered its long- and short-term corporate credit ratings on global diversified mining and trading company Glencore PLC to ‘BBB-/A-3’ from  ‘BBB/A-2’. The outlook is stable.

We also lowered the rating on the debt issued or guaranteed by Glencore and  Glencore International AG to ‘BBB-‘ from ‘BBB’.

The downgrade reflects both our view of the material challenges the mining industry faces, with increased uncertainty about future operating performance in 2016 and 2017, as well as our assessment that Glencore’s 2015 financial profile was below our earlier expectations with funds from operations (FFO) to debt closer to 20%, notwithstanding material debt reduction. This compares to a range of 23%-28% which we previously saw as commensurate with the ‘BBB’ rating. The rating action follows a modest negative re-evaluation of both business and financial factors for Glencore, as reflected in our negative comparative rating assessments. We believe the ‘BBB-‘ rating has more sustainable headroom, particularly in the prevailing low price environment, and we anticipate significant further debt reduction in 2016.

We recently lowered our price assumption for most commodities, including some of the key commodities for Glencore, such as copper, zinc, and nickel (see “Standard & Poor’s Revises Its Price Assumptions For Metals On Continuing Price Weakness,” published on Jan. 22, 2016). This was after metal prices came under pressure because of fears of lower demand from China, combined with excess supply. We believe that commodity prices will remain very unsettled while the impact of China’s slowdown plays out. This environment results in reduced visibility of future profits for Glencore and its peers. For Glencore, in particular, this also has, and may continue to result in, greater reported earnings volatility than we had previously anticipated, even if we recognize the relative stability over time of trading profits compared with those from mining activities. Glencore’s EBITDA in the first half of 2015 was down 29%, broadly in line with BHP Billiton and Rio Tinto.

Nonetheless, under our revised base-case scenario, we project that Glencore’s FFO to debt is likely to recover to above 23%-25%, although this is dependent on our price, foreign exchange, and other assumptions including the company’s December 2015 guidance for lower unit costs and capital expenditure (capex). Critically, we foresee continued delivery of Glencore’s debt reduction plan in 2016 and, in our view, likely disposals in the near term, as well as forecast free cash flow from operations of $2 billion-$3 billion, supported by expected resilient trading profits.

Our forecast of reducing leverage is also underpinned by the debt reduction plan of more than $10 billion that Glencore has been delivering since September 2015. This included a $2.5 billion equity raise, cancellation of the 2016 dividend payments, the further release of working capital, and other steps including disposals.

Key assumptions in 2016 and 2017 include:

• Annual copper production of 1.4 million tonnes-1.6 million tonnes at prices of $2.1 per pound (/lb)-$2.2/lb;
• Annual zinc production of 1.1 million tonnes at prices of $0.7/lb-$0.8/lb;
• Marketing EBITDA of $2.7 billion;
• A moderate net working capital release of $0.5 billion-$1.0 billion;
• Capex of $3.5 billion-$4.0 billion;
• No dividends; and
• Disposals of $1 billion-$2 billion.

Under our baseline, these assumptions result in proportionately consolidated EBITDA of $7.0 billion-$8.0 billion in 2016 and just over $8.0 billion in 2017, compared to $13 billion in 2014. Consequently, we foresee FFO to debt improving to over 23%-25% in 2016 and possibly approaching 30% in 2017.

The stable outlook reflects our assessment that Glencore’s meaningful continuing free cash generation of over $2 billion, strong liquidity, and active balance sheet deleveraging should support the ratings, even in a modestly weaker commodity price environment than our base case assumes. We believe FFO to debt consistently over 20% is compatible with the ratings. We expect rating headroom to materially increase over the coming quarters, as we anticipate significant further debt reduction through disposals. Glencore is targeting disposals of at least $3.0 billion-$4.0 billion, which the company has been delivering since September 2015.

We see the potential for a negative rating action as low, given the expected continued deleveraging in 2016-2017, supported by management’s strong commitment to strengthening its credit metrics and decisive actions to date. Key risk factors would stem from a further prolonged fall in commodity prices, notably if economic developments in China worsened and absent material offsetting factors. A downgrade of Glencore would become likely if FFO to debt remained below 20%. As an example, we estimate that if copper prices averaged below about $1.8/lb over 2016 and 2017, it could be difficult for Glencore to maintain FFO to debt above 20% without compensating measures or factors such as foreign exchange.

Rating constraints could stem from a material acquisition, without comparable offsetting disposals, or a more fundamental adverse reassessment of the resilience of the business mix and profile compared with peers.

The likelihood of an upgrade could increase if we perceived a sustainable improvement in the mining operating environment and Glencore’s earnings performance is stable. We could consider a positive rating action if we anticipate that FFO to debt will remain comfortably above 23%, while seeing continued positive discretionary cash flow.

* * *

To summarize, this is what according to S&P, represents an investment grade rating:

 

And now we look forward to Moody’s to likewise downgrade Glencore, although we won’t be holding our breath: as a reminder, back in December Moody’s already downgraded GLEN to Baa3, the lowest IG rating there is: any more downgrades would automatically mean the start of any latent junk “waterfalls” that may be hidden deep in the company’s $100 billion in total liabilities.

via Zero Hedge http://ift.tt/1QfiN1l Tyler Durden

• CNN reports the US running out of space to store oil.
• 
• At the same time, OPEC actually ramps up oil production…
  
• 

 Many “smart guys” allege that the drop in oil is bad for the ecomomy. I call BS. Oil prices are an input costs. Input costs are what strip revenues down to profits and potentially losses. The lower the input cost, the higher profit. What has occured was a decades long credit bubble that fueld a profligate binging on debt.

It is hard to get off of that drug called free money, particuarly as your dope pusher (those that push rates outside of market force bounds) continues to give you more of that smack. The problem is, eventually, it will catch up to you. The Central Banks have signaled higher rates, and have raised rates 25 bp (roughly 2% of retracement – whoo hoo!).

 The market (well, the fed funds rates futures, not the market per se) is quite skeptical on the Fed raising rates any time soon. So am I, as you have seen above.

Alas, as rates scrape against the zero barrier for sometime now, and break through towards negative,  the party is over and the punchbowl is being removed by the grownups, aka the natural market forces. The Financial Times reports:

The sharp drop in commodity prices and a rising expectation of defaults by highly indebted companies have shaken investors and closed the door on new debt sales. Investors say the dearth of liquidity has made it even more difficult to own paper rated triple C. Late last year several bond funds closed that held high amounts of low-rated and unrated debt. 

“You are seeing a lack of appetite in the new issue market for these types of issuers,” said Matthew Mish, credit strategist with UBS. “[Funds] have outflows and the Federal Reserve is no longer printing money.

Portfolio managers are also experiencing a wave of redemptions from investors. US junk bond mutual and exchange traded funds have counted more than $20bn of withdrawals since mid-November, according to Lipper.

You know what that means. Those oil producers with higher than OPEC costs and high yield debt financing are GUARANTEED to meltdown as oil drops below their breakeven costs (I’d wager somewhere around $50 – $60/bbl if I was a betting man), and stays there. Recent financial reporting seems to corroborate this hunch…

“We expect a shakeout this year in the US oil and gas market, as highly leveraged companies will be forced to declare bankruptcy,” said Bronka Rzepkowski, an economist with Oxford Economics.

A Q&A: Using Veritaseum to take positiions in energy companies through multiple markets. Please be aware that Veritaseum is currently in beta, and the current Java client will be deprecated in lieu of a ubiquitous HTML5 client by the end of the quarter. The info below is for illustrative purposes only.

• How do I enter the trade via Veritaseum? Am I using the web client? My own client that consumes Veritaseum APIs? Place the trade over the phone / fax with Veritaseum’s sales team?

  1. If you are an advanced player you can simply go to our site and conduct the trade yourself using the system and/or your own network to find a counterparty.

  2. As an institution, you can purchase Veritas (ex. $50,000 blocks) to redeem them for advisory services such as setting up trades and finding bespoke counterparties.

  3. Large institutions with their own IT infrastructure can integrate Veritaseum into their system via API. This can also entail a Veritas purchase to assist in the integration, customizations and feature requests.

• Where does the counterparty for the trade come from?

  1. Japan is the largest consumer of Kuwaiti oil, followed by India, Singapore, and South Korea. Since Asia is such a large consumer of OPEC oil in general (and Kuwaiti oil in particular), they can be very aggressive in their purchasing terms, resulting in material concessions from the oil (and risk) producers – the most painful of which are price discounts. We can offer the oil consumers in these markets the ability to directly hedge their purchase risks – both in terms of currency and oil price fluctuation (or oil price volatility, as illustrated above) accentuating the benefits of discounts while simultaneously making discounts potentially less painful by hedging risks for the oil (risk) producers. Their (the Asian companies) purchase of said risks is the counterpart of the sale of the risk from KOC. The oil refineries of Japan, India, Singapore, and South Korea are the most likely potential counterparties but you can also include the money center banks within these countries, not not to mention the major hedge and trading funds and corporations who consume the finished product en masse. Remember, the USD component of the swap can easily be replaced with the Japanese yen, Chinese Remnibi/yuan, Indian rupee or the Korean won.
     

This same chart expressed in USD shows where the hedge benefits, particularly in December…

Entities that aren’t exposed to the Kuwaiti Dinar can still benefit by buying the oil risk and selling their local currency with Veritaseum via a separate swap. The Kuwaiti dinar can also be substituted for Saudia Arabian native currency, or Iraqi dinars, etc.

• Who are the specific counterparties (consumers) of OPEC (producer, of which Kuwait is a major member) oil risk?

1. A joint venture between PetroChina Co. (Chinese), Aramco (Saudi Arabian) and Yunnan Yuntianhua Co. (Chinese) is currently building a 260,000 barrel-a-day refinery in the southwest of the Asian nation.

2. Aramco already manages a 280,000 barrel-a-day refinery and petrochemical complex in China’s Fujian province along with China Petroleum & Chemical Corp., known as Sinopec, and Exxon Mobil Corp.

China is the largest oil consumer after the U.S.

•  IF you are interested in finding about more about this new way of accessing exposure and laying off risk, read the Pathogenic Finance research report, then contact me at reggie AT veritaseum.com.

• Here are the highlights from the report in this most excellent interview with Max Keiser of RT’s Kesier Report.
• 

via Zero Hedge http://ift.tt/1Qffze8 Reggie Middleton

The Fed may "seriously consider" negative rates after moving rates back to zero, reintroducing forward guidance and making "stronger pleas" to Congress for fiscal policy action as there are complications for money markets, according to BofAML strategist Mark Cabana.

This would not be a total surprise as Mises Institute's Joseph Salerno warns recent Fed commentary suggests they want to test-drive negative interest rates…

Of course, as we noted previously, NIRP in America is becoming more inevitable…

 

via Zero Hedge http://ift.tt/1Qffze2 Tyler Durden

As this website exclusively reported three weeks ago, under explicit guidance by the Dallas Fed and associated regulatory pressure, US lenders have been instructed to not only not accelerate energy company counterparty defaults but to suspend energy loan book MTM entirely in distressed cases to avoid contagion concerns.

Questionable marks notwithstanding, in their fourth quarter earnings reports and conference calls banks had no choice but to reveal what their existing “publicly appropriate” exposure to oil and gas companies looks like.

As Janney analyst Jody Lurie wites, “banks devoted more attention to provisions, which caused some margin deterioration. Below, we included a chart laying out each firm’s energy and commodities related exposure.”

So for all those looking for a comprehensive summary of publicly available data of the bank sector’s exposure to oil and gas firms, here is Janney’s comprehensive summary of US bank energy and commodity exposure, with the caveat that should depressed oil prices persist, all of these indicators will undoubtedly be revised drastically worse as model marks have no choice but to catch up to market reality, despite any pressure the Dallas or any other Fed may wish to exert on the US banking system.

via Zero Hedge http://ift.tt/1S36NFS Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The ultimate cost of protecting the privileges of the few at the expense of the many is the dissolution of the social order that enabled the rule of the privileged few.

When I write about the demise of unsustainable systems, readers often ask me to describe the collapse I see as inevitable. This is a tough assignment, as there are as many kinds of collapse as there are systems: fragile ones can collapse suddenly, and resilient ones can decay for years or even decades before finally imploding or withering away.

Another way of describing collapse is: complex systems become much less complex.

Certain features of modern life could collapse without affecting everyday life much–for example, the derivatives markets could stop working and the impact would be enormous on those playing financial games and those who entrusted money to the gamblers, but the consequences would be extremely concentrated in the gambler/speculator class. Despite the usual cries that financial losses in the gambler/speculator class will destroy civilization, the disruptions and losses would be widely dispersed for the economy as a whole.

Other collapses–in food or energy distribution, digital communications, etc.–would have immediate and severe impacts on daily life.

My three primary models of decay and collapse are:

1. Historian David Hackett Fischer's masterwork The Great Wave: Price Revolutions and the Rhythm of History (given to me by longtime correspondent Cheryl A.)

2. Thomas Homer-Dixon's The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization

3. The decline of the Western Roman Empire (the process, not Edward Gibbon's epic 6-volume history). My recommended book on the topic (a short read): The Fall of the Roman Empire

Fischer's primary thesis is that society and the economy expand in times of plentiful resources and credit, and this increased demand eventually consumes all available resources. When demand exceeds supply and excesses of credit reach extremes, inflation and social disorder arise together.

Though we have yet to see inflation on a global scale, it is inescapable that demand will soon outstrip supply of essential resources and that the global credit bubble will pop, depriving the economy of the means to buy resources regardless of cost.

The Upside of Down describes the process of increasing complexity adding fixed costs to the system, and the way in which this diminishes returns: more and more labor, capital and resources must be devoted to maintain production. At some point, the yield is negative–costs are higher than the output.

At that point, systems start unraveling, and people simply abandon costly complex systems because the means to support them no are no longer readily available.

This is similar to John Michael Greer's process of catabolic collapse, in which costly complex systems go through a re-set to a much lower energy consumption and less complexity. The system stabilizes at that level for a time, and then as costs rise and resources dwindle, it goes through another downsizing.

The Western Roman Empire (along with the Tang Dynasty in China) is the premier historical template for slow decline/decay leading to an eventual collapse. (Recall that the Eastern Roman Empire, the Byzantine Empire, endured for another 1,000 years.)

Depending on how you slice it, Western Rome's Imperial decline took a few hundred years to play out. Unusually competent and energetic leaders arose at critical junctures in the early stages, and these leaders managed to stem the encroachment of other empires and "barbarian" forces and effectively re-order Rome's dwindling resources.

By the end, The Western Roman Empire was still issuing a flood of edicts to the various regions, but there was no one left to follow the edicts or enforce them: the Roman legions existed only on parchment. The legion had a name and a structure, but there were no longer any soldiers in the field.

A number of real-world examples of decline/collapse are playing out in real time. Venezuela is one; Greece is another. Both demonstrate the opacity of the process of collapse; it is not as clear as we might imagine. A recent first-hand account of a sympathetic visitor to Venzuela captures the flavor and despair of slow-moving, uneven collapse:

Venezuela: Is There A Driver At The Wheel? (via Arshad A.)

"A dollar traded in the bank officially, or pulled out of an ATM machine, however, is worth about six bolivars only. This is how big the gap is between the black market rate (600-700 to the USD) and the official rate.

Despite the fact that the price of petrol is incredibly cheap, the government has not raised the prices even a slight amount, although this would create revenue for the state and despite the health risks of pollution.This suggests that the government is engaging in populism by refusing to take a step demanded by common sense due to its need to get reelected in December when parliamentary elections will take place.

One can easily get assassinated, as Venezuela has one of the highest homicide rates in Latin America and there are enough people who would not mind killing someone for the fee of $200.

However, when there is massive violence in the streets and many in the government seem to be corrupt, while a sense of anarchy prevails and it seems that the government turns a blind eye to violence when it takes place by local bandits, preferring to continuously blame outsiders, then there is indeed a source for concern."

Reports out of Greece demonstrate the dynamics of decline and collapse: medicines are unavailable, pensions have been slashed and many households are now below the EU poverty level in income.

But we also hear that life goes on; the social order does not appear to have broken down into anarchy.

Clearly, the Greek economy has contracted, and millions of households have less income than they did before. But has daily life broken down? Have the institutions of public order collapsed?

Perhaps not, but what is collapsing is public trust in these institutions' ability and willingness to manage the financial crisis and the political disorder that follows.

There is no good solution to the multiple crises in Greece, and the small circle of financial and political elites that benefited from Greece's entry into the Eurozone remains largely untouched by the crisis. When the status quo is rigid and unbending, the odds of sudden collapse rise: what doesn't bend will snap.

The process of collapse is thus heavily dependent on how the financial and political elites respond to the decline of resources and credit. If they manage the contraction skillfully and absorb their share of the inevitable losses, then the re-set will likely be successful and the pain short-lived.

If however the ruling elites cling to every scrap of their power and wealth, and begin fighting over the spoils while forcing the underclasses to absorb the losses of the re-set, then the fragility of the system rises in direct proportion to the policy extremes being pursued by vested interests focused on protecting their privileges regardless of cost.

The ultimate cost of protecting the privileges of the few at the expense of the many is the dissolution of the social order that enabled the rule of the privileged few.

via Zero Hedge http://ift.tt/1o9Wkw0 Tyler Durden