Following the plunge in Glencore's (L:GLEN) share price, investors raised concerns that the mining giant may be the next Lehman Brothers. Is that true?
Glencore is an Anglo-Swiss multinational commodity trading and mining company that was significantly hurt by the decline in commodity prices. Its share price fell almost two-thirds between July 2014 and September 2015 (but it rebounded later). The company caught our attention at the end of September, when its share price plunged about one-third just in one day. As Glencore is the world’s largest commodity-trading company and the tenth largest company in the world, investors started to worry that Glencore’s problems (high debt and reduced earnings by low commodity prices) would trigger the next ‘Lehman moment’.
Are these fears justified? Undoubtedly, the company is too indebted with net debt worth almost $30 billion and much larger gross debt due to off-balance sheet liabilities resulting from its massive trading arm. However, although Glencore’s problems will hit the creditors, it should not turn into the next Lehman Brothers crisis. Why? First, Lehman was more than 4 times bigger. Second, Lehman was much more leveraged with only 3 percent of assets financed by equity, while Glencore has one third of equity. And Lehman had a 15 times larger derivatives exposure (after netting). Third, Glencore has a more stable capital structure and generally funds short-term assets by short-term debt, while Lehman funded long-term assets with short-term debt more freely, so it suffered from a severe maturity mismatch. Fourth, Lehman was much more systematically important than Glencore, which is not a major dealer, so there is lower risk of contagion. And the financial system was more fragile before Lehman (actually, the crisis started in 2007), while today we have so far experienced a slowdown in economic growth rather than serious financial turmoil. Fifth, Glencore is not expected to be bailed out – this is an important difference, because the very Fed’s decision to not bail out Lehman set off the panic.
To sum up, Glencore suffers from serious economic problems due to low commodity prices, but it should not trigger the next Lehman Brothers crisis. The price of gold would not get a boost (not yet). This does not mean that financial system is healthy and stable, but investors should look for other candidates for the next Lehman (maybe Deutsche Bank (N:DB)?).