Commodity Traders Win Billions in Loans Amid Glencore Storm

Updated on
  • Vitol signs record $8 billion of syndicated loan facilities
  • Trafigura won improved terms on $2.2 billion loan package

For all the fears that Glencore Plc could buckle under its weighty debt load, a wave of new bank loans this month shows the concerns aren’t spreading across the commodity-trading sector.

Banks are granting new credit lines to Glencore’s biggest trading rivals, including a record $8 billion of loan facilities on Tuesday to Vitol SA, the Swiss unit of the world’s biggest independent oil trader. Trafigura Pte Ltd. won improved terms on a $2.2 billion loan refinancing deal on Oct. 1 via a group of 28 banks. Swiss commodity traders Gunvor Group Ltd. and Mercuria Energy Group Ltd. are also marketing credit facilities totaling $2 billion.

The transactions show banks are still eager to loan money to commodity traders even after debt concerns caused by wild swings in Glencore’s stock and bond prices. At one point last week, credit markets gave the company about a 50 percent chance of defaulting within five years. That started to spread beyond Glencore as yields on bonds issued by trading houses Trafigura and Louis Dreyfus Commodities BV widened to record highs last week. They’ve since recovered some of their losses.

There’s a mismatch between how bankers and equity analysts see the commodity-trading industry.

“I am convinced that analysts who cover mining companies or other commodity producers with trading operations still need more information about the business of trading commodities,” Roland Rechtsteiner, a partner at Oliver Wyman in Zurich, said in a phone interview.

Credit Oversubscribed

The new loans and refinancing signal banks are comfortable lending to commodity traders, whose business models allow them to profit from volatility and lower financing costs amid weaker prices for raw materials.

Vitol’s record credit facilities from a group of 57 banks were increased by a third after the initial $6 billion sought by the trading house was oversubscribed by $2.7 billion, the Rotterdam-based company said in a statement. The facilities, refinancing a debt package signed 12 months ago, are the biggest in the firm’s 49-year history, a Vitol spokeswoman in London said.

The loan package, coming after Trafigura last week agreed to lower lending rates, suggests some analysts don’t understand the business of trading houses, which can benefit from lower commodity prices and the current contango market structure that allows them to profit by storing oil because forward prices are higher than current costs.

Price Swings

Vitol reported net income of $1.35 billion last year, the highest since 2011, as its trading business benefited from price swings in the energy market. Trafigura, the second-biggest metals and independent oil trader, posted record first-half profit of $654 million this year.

Yields on Trafigura’s 606.7 million-euro bond, maturing in 2018, have narrowed 251 basis points since reaching 10.76 percent a week ago. The yield on Louis Dreyfus’s 2018 bond widened to 7.09 percent last Wednesday, before narrowing to 6.64 percent as of 9:35 p.m. London time.

Officials at Trafigura and Louis Dreyfus declined to comment on the performance of their bonds and access to bank credit.

“Given the recent turbulence in the commodities space, we have been repeatedly asked by investors on the banks’ exposure to commodity traders,” analysts at Sanford C. Bernstein led by Chirantan Barua wrote in a note Monday. “The turbulence in commodities has resulted in the bonds of a number of key commodity players trading toward junk levels. Naturally investors are spooked about the banks’ exposure to these players.”

Raising Debt

Commodity traders have raised at least $125 billion of debt, of which about $75 billion is loans, according to Bernstein.

Criticisms that the operations of its trading business are secretive and its financing arrangements opaque prompted Glencore to publish a “funding factsheet” Tuesday that further explained its lending arrangements. Shares of Glencore, headed by billionaire Ivan Glasenberg, have more than recovered losses since its record plunge a week ago. That slump was sparked by concern about the company’s $30 billion debt load and its plans to curb borrowings amid a rout in commodity prices. The shares rebounded after it said its business is “robust” and it has secure access to funding.

Louis Dreyfus Commodities, the world’s largest raw-cotton and rice trader, said in its interim report last month that it had six revolving credit facilities with staggered maturity dates totaling $3.3 billion. In June, it amended and extended its North American facilities totaling $1.6 billion and in July it refinanced a $400 million Asian lending facility with the company securing an option to request an increase of $100 million.

Noble Agri, the agricultural commodity trader majority owned by China’s Cofco Corp., attracted four new lenders to its $1.58 billion one-year revolving credit facility, people familiar with the matter said this month.