The Hottest Deal for Commodity Traders: Buying Their Own Bondsby
Glencore turmoil propels yields to as high as 30 percent
Trafigura, Louis Dreyfus and Noble Group bonds also hit
Forget oil, copper and wheat. Commodities traders are crowing about the money to be made in the bond market.
On the cocktail party circuit at the industry’s LME Week earlier this month, at least a dozen traders and executives said that the surest profits these days was in debt issued by their employers and their very own rivals: Glencore Plc, Louis Dreyfus Commodities BV, Trafigura Pte Ltd. and Noble Group Ltd.
Take $1.25 billion of Glencore notes maturing this month: the yield surged to a record 32.3 percent on Sept. 29, up from less than 2 percent in early September. Buying $1 million worth of the bond that day may generate in excess of $35,000 in profit in less than four weeks if Glencore repays the notes by maturity on Oct. 23.
Bonds got sucked into the same vortex that sent Glencore shares plunging 30 percent in a matter of hours on Sept 28. Even as yields surged, traders said the turmoil hadn’t shaken the backing of the lenders who financed the industry, suggesting the bonds were a safer bet than the markets had priced in.
"The bonds of the trading houses were extremely cheap," said Graham Sharp, an adviser to consultants Oliver Wyman & Co. and co-founder of oil and metals trading house Trafigura. "This was an anomaly."
While the natural resources industry is battling the worst drop in prices since the global financial crisis, traders -- particularly in oil -- are benefiting from the pick up in price volatility.
Not only traders, but the firms themselves have been buying back their own debt. Gunvor Group Ltd. last month completed the repurchase of the commodities trader’s $500 million debut bond. The yield on the notes peaked at more than 14 percent in December after the U.S. imposed sanctions on co-founder Gennady Timchenko. The Russian billionaire sold his stake one day before the sanctions were announced.
To be sure, traders have an interest in getting their bond prices higher. Glencore’s longer-dated bonds are still some way from a price commensurate for a company with an investment grade credit rating. For example, its 1.25 billion euro-denominated bonds maturing in 2021 are quoted today at about 77 percent of their face value.
That reflects concern about the long-term prospects of the business. Credit-default swaps insuring Glencore’s debt against default within five years surged to a more than six-year high of 882 basis points on Sept. 29 from 300 basis points earlier in the month. The contracts now cost about 649 basis points, according to CMA.
The net amount of debt protected increased to $2.3 billion through Oct. 19 from $1.7 billion in July, data from the Depository Trust & Clearing Corp. shows.
Glencore declined to comment.
As investors doubted about the finances of Glencore and its rivals, the price of their debt gyrated wildly. Yields on Glencore notes denominated in swiss francs due in 2016 surged to more than 16 percent on Sept. 28, up from less than 1 percent weeks earlier.
Dwight Anderson, founder of commodity hedge fund Ospraie Management, said in a “Bloomberg <GO>” television interview with Stephanie Ruhle and David Westin that Glencore’s debt offered a better risk-adjusted return that its equity.
Other traders have also seen their bonds plunging. Trafigura, which earlier this year reported its best-ever first-half result with $653 million in net income, saw the yields of its 2018 bond surging to a record of 10.7 percent on Sep. 29, up from 6.5 percent in early September. The bonds of Trafigura were cheaper than those of Puma Energy, a subsidiary in which the trading house owns a nearly 49 percent stake.
The yield of Louis Dreyfus Commodities’s inaugural bond, due in 2018, surged to 7.09 percent on Sept. 30, up from 3.3 percent in early September. Since then, it has dropped back to 4.7 percent. The yield of Noble Group’s 2020 bond surged in late September to a record of 17.6 percent, up from about 7 percent in August.
The bond market volatility hasn’t been reflected in banks willingness to lend to the traders. Trafigura won improved terms on a $2.2 billion loan refinancing deal on Oct. 1 via a group of 28 banks, the same week as the yield of its bonds surged to a record.
(An earlier version of this story corrected the date Gennady Timchenko sold his stake in Gunvor.)