There has been recent news flow on commodity miner and trader Glencore’s high debt levels amid weak commodity prices. The credit default swap on Glencore’s 5-year bonds has almost doubled to just under 7%, from 4% a month ago. Singapore bank DBS – which is likely to have exposure to Glencore – has tumbled 9.4% over the past three weeks.
 
Macquarie Equities Research (MER) released a research report last Thursday, stating the theoretical impact on Singapore banks having an exposure to Glencore. Here are MER’s estimates…
 
Below are excerpts from the MER report released on 1 October 2015:

Impact
DBS, StanChart and HSBC likely have exposure to Glencore – DBS, StanChart and HSBC were part of a large group of banks that participated (as mandated lead arrangers) in a US$10.2billion revolving credit facility in May 2010. StanChart and HSBC also participated in a US$4.4billion revolving credit facility in April 2012, and a US$6.0billion multi-currency revolving credit facility in October 2011 (with Xstrata, which merged with Glencore in 2013).
 
Exposure to Glencore collateralised, and likely small – MER notes that these loans are collateralised against Glencore’s trading inventories, which are liquid, and often hedged.S$6.5billion of Glencore’s existing US$15.3billion revolving credit facility has been drawn as at the first half of 2015. DBS, StanChart and HSBC are probably not the biggest lenders among the consortium, which are probably led by key advisors to Glencore’s recent merger with Xstrata in 2013.
 
Revisiting stress test impact on total commodity exposure as at first half of 2015:
In MER’s previous stress test published on January 2015, a 10% default rate for all commodity finance related exposure and 40% recovery rate was used. In comparison, 7% of Energy related rated bonds defaulted in 1986, as oil prices declined by 70% since the peak in 1980.

Since the above-mentioned report, commodity exposure has not grown for banks in MER’s coverage. Notably, StanChart reduced its commodity exposure by 20% year-on-year as at the first half of 2015.
 
For Singapore banks, the theoretical impact on 2016 pre-tax profit, by assuming a 10% default rate and 60% recovery rate, would be up to 29% (S$4.0billion) for the sector, based on MER’s scenario analysis. MER believes Singapore banks are 70-80% geared to commodity trade financing (i.e. lower risk), or of a short tenor.


Singapore banks - Commodity exposure
The total commodity exposure of the Singapore banks is between S$25billion and S$49billion as at first half of 2015, thereof 70-80% geared to trade finance, based on MER estimates.

- MER estimates DBS to have S$49billion commodity exposure. DBS guide that their exposure to oil and gas to be less than S$20billion. Their total exposure to commodities is not disclosed, but DBS has around S$29billion of commodity loans. For DBS (but not UOB and OCBC), there is some overlaps between the commodity and oil and gas exposure.

- MER estimates OCBC to have S$27billion commodity exposure. OCBC guide their oil and gas exposure to be around S$12.5billion, and non oil and gas commodity exposure to be S$14.5billion.

- MER estimates UOB to have S$25billion commodity exposure. UOB guide that their total commodity
exposure to be less than S$30billion.

 
Exposure of Singapore banks to Glencore, Wilmar and Noble
- MER notes that DBS likely has an existing banking relationship with Glencore. Based on Glencore’s 2012 prospectus, DBS was part of a large group of banks that extended US$10.22billion secured revolving credit facilities to Glencore in May 2010. MER notes however that DBS would probably not be the biggest lender among the consortium, which are probably led by key advisors for their recent Xstrata deal per the prospectus above.
 
- MER is not aware of any banking relationship between Glencore and UOB or OCBC.
 
- MER notes that DBS, UOB and OCBC likely have an existing banking relationship with Wilmar. OCBC participated in the January 2014 US$1.75billion revolving credit facility syndication. DBS and UOB also participated in a US$2.1billion term loan facility in September 2013.
 
- MER notes that DBS and UOB (but not OCBC) are one of 41 principal bankers of Noble. DBS and UOB were also one of 15 who participated in the May 2015 US$2.3billion committed unsecured revolving loan facility.

UOB likely has very long and strong banking relationship with Noble, and was the sole manager, underwriter and placement agent for Noble’s IPO in 1997.
 
MER is not aware of any banking relationship between Noble and OCBC.

For the Singapore banks, MER remains very watchful on
- commodity exposure which is S$25billion-S$49billion (thereof 70-80% trade finance related), of which  commodity loans account for 7-14% of total loans.

- non-trade finance exposure outside Singapore particularly to the rest of ASEAN

-SME and unsecured exposure across all regions

- non-trade finance US$ denominated lending
 
Outlook
MER remains constructive on Singapore banks.
 
In MER’s view, DBS looks to be best positioned, UOB is more at risk due to its ASEAN exposure and OCBC may experience stronger headwinds for earnings from normalising loan loss provisions from current low levels.
 

Source: Macquarie Research - 5 Oct 2015