Barclays turn to bank models to fathom Glencore's complexities

* Analysts scramble to decipher further risks at indebted company

* Glencore (Xetra: A1JAGV - news) still has options if commodity prices stay low

By Michael Turner

LONDON, Oct (HKSE: 3366-OL.HK - news) 1 (IFR) - Barclays (LSE: BARC.L - news) analysts are using models designed for banks to try and lift the lid on the potential risks at beleaguered commodities trading house Glencore, joining the firm's attempt to throw off accusations that it is overly indebted and opaque.

The equity and bond markets took fright on Monday after an Investec (LSE: INVP.L - news) note warned that the company was not doing enough to cut its debt to withstand a prolonged fall in metal prices.

Barclays, which held a meeting for Glencore and its investors on Wednesday, is evaluating Glencore as they would "a financial firm facing stress", based on the amount of risk posed by the company's trading operation, its analysts said in a research note published on Thursday.

"Glencore suffers from a lack of transparency in its financing structure," said a bond trader, echoing the views of his peers. "This has had an lot to do with current sentiment in the market."

Glencore grew quickly through the commodities boom of the last 10 years, snapping up assets - most notably merging with Xstrata in a US$29bn 2013 deal - when commodity prices were high.

"We heard many investors express concern that ... those assets might be worth less than the debt used to fund their purchases," said Barclays.

So just as it would for a bank, Barclays is using capital adequacy as the first layer of viability and the UK bank sees Glencore with a book value of more than US$20bn, versus a market capitalisation of US$17bn on Thursday.

This metric of book value versus market cap is positive even after the share price almost recovered to where it was before Monday's sell-off, at 96.91p.

SOME WRIGGLE ROOM

Barclays measures Glencore's liquidity position next and while the commodity trader does have US$1.6bn of bond redemptions due in October, it will still have around US$12bn of liquidity coming into 2016, according to both Barclays and Thomson Reuters (Dusseldorf: TOC.DU - news) analysis.

One benefit that Glencore has over banks is that the commodities trading market has far fewer participants than the over-banked financial system, with just a handful of truly global players.

"So while a downgrade may infer lower profitability," said Barclays, "it does not seem like it would result in an immediate or unmanageable loss of counterparties."

Glencore still has a few levers left to pull if commodity prices remain low. The firm can sell assets, which is a route taken by fellow commodity firm Rio Tinto (LSE: RIO.L - news) this week after the company agreed to sell its stake in an Australian mine for US$606m.

Glencore also has undrawn bank lines and around US$7bn in cash, from Barclays' estimates, that can be used if liquidity becomes an issue.

LONG TERM CHALLENGES

However, the company still faces huge challenges if commodity prices continue as they have done in recent months.

"The risk of further falls in commodity prices remains," said Barclays.

Ebitda at the commodities house already plunged 29% year-on-year to US$4.6bn in the first half of 2015 because of weaker commodity prices.

Another major hurdle that Glencore must overcome is convincing its lenders to roll over a US8.45bn one-year credit line that comes due in May 2016.

The deal has an extension option, meaning it can push the facility out by another year, but doing so could send a calamitous message to the market.

"If Glencore exercises this option the implication would be that the banks did not roll the facility; we would expect a significant negative reaction to this in credit," said Barclays.

Furthermore, Glencore treats its US$17.7bn of readily marketable commodity inventories as being as good as cash when calculating its net debt, according to Thomson Reuters.

Even (Taiwan OTC: 6436.TWO - news) though swinging commodity prices mean that the value of this cash-equivalent could shift significantly day to day.

Many of Glencore's bonds have begun the road to recovery after the falls earlier in the week. The issuer's US$1.5bn 4.125% May 2023 notes, for example, are bid at a cash price of 80.1 on Thursday morning, according to Thomson Reuters Eikon. This comes after the notes crashed to a lifetime low of 62 on Wednesday from 82 on Monday. (Reporting by Michael Turner; editing by Helene Durand and Alex Chambers)