Extreme Commodity Prices Volatility Pressures Commodity Trading Houses Bonds

The explosion in commodity prices volatility has seen coal, oil and natural gas prices surge, the Nickel market halted for a week and grains prices hitting record highs. Unintended consequences and contagions flow through in heavily levered and multi-faceted financial markets. In the past week, the yield on Gunvor Group Ltd. bonds due in 2026 rose as high as 16.8%, Trafigura Group bonds due in 2025 rose to almost 10%. Credit default swaps on Louis Dreyfus Co. debt on Friday quoted at more than 260 basis points, having traded below 140 pre-invasion, according to data on Bloomberg

Russia is one of the world’s top exporters of oil, gas, wheat, nickel and aluminum. Ukraine also is known as the breadbasket of the region. Sanctions following the invasion have threatened traders operating assets and supply agreements.

Traders have been under pressure from banks and brokers to post margin calls with these massive moves.

The European Federation of Energy Traders is petitioning for “emergency funding mechanisms” in order to prevent some traders from experiencing liquidity problems that could lead to financial contagion, according to a letter viewed by Bloomberg. Members of the industry group include Shell Plc, TotalEnergies SE, Vitol Group and Mercuria Energy Group Ltd. among others.

“Since the end of February 2022, an already challenging situation has worsened and more energy market participants are in a position where their ability to source additional liquidity is severely reduced or, in some cases, exhausted,” according to the letter, which was first reported on by Risk.net on Monday.

Commodity traders are a crucial cog in global trade, providing liquidity and taking on risk. That growth historically has been funded by loans from banks rather than the corporate debt markets.

Volatility also means opportunity for traders, meaning the traders want to have access to that opportunity and raising money to do so.

Trafigura Group is raising a $1.2 billion syndicated revolving credit facility designed to help it navigate “unprecedented market conditions and extreme volatility,” Chief Financial Officer Christophe Salmon said in a notice on Tuesday. The company expects to increase the facility to over $2 billion “within a short period of time,” Salmon said.

The yield on Trafigura’s bonds due in 2026 jumped from less than 4.5% before the Russian invasion of Ukraine to a high above 10% last week, before coming back to around 7.7%. 

Mercuria Energy Group Ltd. was also looking for funds, people familiar with the matter said on Monday Bloomberg reported.  Vitol, the world’s largest oil trader has also been among discussions.

So far trading houses are yet to take on capital to broaden equity bases. While some of the biggest, such as Glencore Plc and Bunge Ltd. took their equity public, most remain privately owned by executives.

Source; Bloomberg

From The TradersCommunity Research Desk