Analysts Warn on Glencore Debt, Draw Comparisons with Lehman Brothers

The commodities trader has drawn comparisons as the potential Lehman Brothers of the resource market.

Analyst warnings this week over International commodities giant Glencore's uncertain financials are setting off fears of a collapse at the company that could cause a disastrous domino effect across the resource market, CNBC reports. 

Reports say that Glencore, which counts fuel oil and bunkers amongst the many areas it is involved in, has an uncomfortably high debt load that is closing in on $30 billion versus its $16 billion market value, with a debt base that surpasses its peers.

According to separate sources, Glencore's leadership have failed to reassure markets, which in part contributed to the company's 29 percent plunge on the London Stock Exchange early this week. 

"Despite the drastic action that management has announced recently (even assuming all of the measures are successfully implemented), a spot price scenario results in an almost complete collapse in forward earnings such that no meaningful estimate of shareholder value can be derived under our P/E [price/earnings] methodology," analysts from Investec said in a note Monday.

"In effect, debt becomes 100% of enterprise value and the company is solely working to repay debt obligations."

Nigel Wilson, CEO of UK-based Legal & General Group, commented: "There's a lot of noise and there's not enough signalling,"

"That lack of information causes a huge amount of uncertainty at Glencore, which is having a massive contagion effect across the world."

Lehman Brothers

On Tuesday, Glencore reportedly defended its results against comparisons that it could be the Lehman Brothers of the resource market, describing the company as "operationally and financially robust."

"Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding," it added. 

Meanwhile, an unnamed source at Glencore was quoted as saying the comparison to Lehman Brothers was "totally incorrect," a view elaborated on by Andrew Sullivan, managing director of sales trading at Haitong International Securities.

"Lehman had assets but it wasn't able to realise those at the time. With Glencore, they have the ability to sell things off, the prices may not be what they want but they do have a chance to reduce their debt if they choose to," he told CNBC.

Despite the assurances, analysts reportedly remain wary of the company's ability to repay debt quickly, as its highly-leveraged status could be threatened by even a slight drop in commodities prices. 

However Glencore is expected to step up its divestiture of assets, which is in line with the company's ongoing debt reduction plan that has seen it halt its dividend and sell off shares.

Earlier this year, Ship & Bunker also reported that a fuel oil buying spree undertaken in June likely failed to pan out financially for Glencore as global crude benchmarks plunged in July.