Top Tweets Today: 28/09/2015

I've been following the Glencore story over the past week as things have taken a turn for the worst with today being disastrous for shareholders as the stock price plummeted over 25%. It's clear now that there's distress between shareholders which can't bode well for management confidence. What I don't clearly understand at present is why the price is receiving a drubbing when there are plans in place to reduce debt levels. Do investors feel management can't pull a rabbit out the hat that they've so promised to do?

Analysis Andrew Todd tweeted this today saying that CDS (Credit Default Swaps) had gone as high as 550 basis points and back in the flurry of 2008 crash, 400 basis spelt trouble.  

Glencore Credit Default Swaps moving out to 550bps. Anything above 400bps indicates major problems! pic.twitter.com/KLYryfaRIv

— Andrew Todd (@andrewbtodd) September 28, 2015

For those of you who don't know what a credit default swap is, I'll briefly explain;

When an issuer of a debt security issues a bond, at the time of issuance they can safely assume that they can make regular payments on their debt, a company would not issue debt it couldn't afford, besides the market wouldn't buy into it. However things change as time passes, which means the company's profitability may have been adversely affected by any event which makes them prone to default.

The buyer will obviously face a degree of risk, so in order to mitigate this risk the buyer could enter into a contract with a seller of CDS that stipulates that the seller will pay the buyer the value of the bond and interest payments should a default occur. In return for the protection the buyer will pay the seller annual payments for assuming the risk. Basically its insurance.

If you'd like to find out more you can do so at Investopedia.

In Glencore's case, the debt they've racked up doesn't have the same terms of maturity, chances are they accumulated it over many years. However because of the resources slump profitability has taken a nose dive but the debt levels have stayed the same. Because of the speed of the selloff it hasn't allowed the company to take decisive action to arrest the purge. So now the company is sitting with huge amounts of debt and lower potential revenue which cannot cover interest and principal payments of debt which is why the CDS have surged to 550 bps.

Glencore Default Risk Surges Above 50% http://t.co/OyvRa2wXo4

— zerohedge (@zerohedge) September 28, 2015

The selloff started when analysts at Investec said that they saw the value of Glencore hitting zero. Shareholders responded with a big kick up the...

#Glencore: To catch a falling knife.... pic.twitter.com/FC2G6KTrnn

— Mark Barton (@markbartontv) September 28, 2015

Does this commentary justify a 31% drop in shareholder value in just one day?

Ivan Glasenberg sunk serious cash into the recent rights issue, totalling $200 million of his own money to show his confidence in management's plan but is it enough to save this company from folding?

Only time will tell.