Two weeks ago, in a stunning development, Glencore officially folded the towel on not only its global expansion ambitions and its bullish commodity case, but admitted it was far too levered for the current recession in commodity prices. As a result, Glencore CEO Ivan Glasenberg unveiled a $10 billion deleveraging plan in order to prepare for a “doomsday scenario” for commodity prices.
Sure enough, the company’s CDS which Zero Hedge had said back in early 2014 with “Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?” was the best way to bet against the Chinese blow up currently in progress, tumbled from a level in the mid-400s to 300 bps on hopes Glencore would be able to successfully delever to a 2x net debt level.
The first crack in these hopes emerged just a few days after the company’s deleveraging announcement when Moody’s downgraded Glencore Baa2 outlook to negative, despite the proposed equity raise, asset sales and capex mothballing.
In doing so Moody’s merely confirmed our skepticism from September 7 when we said this Glencore’s action “merely reinforces our thesis and allows all those who missed the initial blow out in GLEN credit default swaps to put the trade on… at levels not seen since about a month ago. Because as a result of today’s asset-stripping and equity-raising activity, Glencore is now a that much better levered bet on China’s economy in a broad sense, and copper pricing in a narrow one.”