This graph is less than 18 months old.
That’s Glencore’s CDS spread, courtesy of Markit, topping out at around 3125 bps back in early December 2008.
None specialists should be aware that a CDS spread more than 3000 bps wide is tantamount to an entity “going bust already.” Except that Glencore wasn’t and didn’t.
Credit markets were on a manic hunt for a big default at the time. There was talk of a handy pairs trade also, involving Glencore CDS and shares in Xstrata where (then and now) Glencore controls a third of the stock. But the real reason Glencore shot out so wide is that, in illiquid trade, the price was spinning out into an information void.
Eighteen months on and, as of last Friday, the Glencore spread was back to a much more normal-sounding 168 bps. But that was before this weekend’s events, including this remarkably sure-footed report of a $80bn merger between Glencore and Xstrata, and then a leftfield 40 per cent super tax on mining landing in Australia.
Monday’s public holiday across most of the world meant we coudn’t immediately get a fresh quote out of London for the Glencore CDS. If and when we do, however, the betting has to be that it will be impacted more by the tax hike than the merger tale.
The option of a full union between Xstrata and Glencore has been kicked around for some time. Plenty of banks seem to be working on a putative deal (Goldman, JP Morgan Caz and Deutsche Bank for Xstrata; Morgan Stanley and Citigroup for Glencore), but there is a strong view that Glencore will actually have to float before a merger with Xstrata can be properly considered.
The reason? Glencore is just so opaque, Xstrata shareholders would never trust a private valuation.