New York (HedgeCo.net) – The slump in commodities has taken a toll on the hedge fund industry as a number of hedge fund firms have closed their commodity-based hedge funds in 2015 as the slump in commodity prices caused many of the funds to lose money and the funds were losing investors as well. Could the slump in commodities taken an even deeper toll on the investment industry like the one we saw in the financial crisis in 2008?

An article in The Telegraph over the weekend built a pretty compelling case that we could see major commodity-based trading firms going out of business the way we saw Bear Stearns and Lehman go under during the financial crisis. The foundation of the article is that the cost of high-yield credit is going up and that is cutting in to the profit margins of the firms.
The article focused on the debt issued by Glencore, Trafigura, Vitol and Noble and it looked at the discounted prices on each firm’s debt as a gauge for the risk of the firm going under. Glencore’s debt is trading at $0.82 on the dollar while Trafigura’s debt is trading at $0.86 on the dollar and Noble is at $0.73.

The article also looked at the price of credit default swaps (CDS) for Glencore and the price has more than doubled in the last month, jumping from 280 to 625. The article noted that a CDS over 400 is the sign of a significant default risk.
This theory will certainly be something to keep an eye on in the coming months as it could spread to other areas of the finance industry. The exposure to the debt issues of the commodity trading firms could hit banks and other investors.

Rick Pendergraft
Research Analyst
HedgeCoVest