Any market trader knows the problem. A bet goes wrong. You end up owning a load of stuff unintentionally. A lorry full of apples, perhaps. Or a job lot of European zinc smelters.
Swiss commodities trader Trafigura will take control of Brussels-listed Nyrstar, of which it owned 24 per cent. This follows a restructuring plan announced on Monday for Europe’s biggest zinc producer. Nyrstar, whose market capitalisation has fallen from €780m at the start of 2018 to almost nothing, misjudged an expansion into mining and ran up debts in excess of €1bn, which it struggled to service.
Prices of zinc, used to galvanise steel, fell steeply late last year on worries about demand from China and the motor industry. In effect, Trafigura is betting on this year’s price rebound continuing. The danger is of Trafigura straining its swollen balance sheet.
Total debts at employee-owned Trafigura exceed $32bn. Its preferred “corporate debt” metric deducts working capital, cash and the massive sums tied up in inventories — some $15.6bn according to latest figures. Even on this flattering metric, however, debts of $4.8bn were 2.8 times last year’s ebitda (a cash profit measure), up from 2.3 times in 2017.
Monday’s deal depends on securing agreement from Nyrstar bondholders facing a “haircut” of roughly 60 per cent on their holdings. Trafigura has structured the deal to appear neutral to debt ratios. The use of €262.5m in perpetual bonds and €225m in zero-coupon bonds linked to zinc prices would be considered as quasi-equity. The perpetuals will still incur servicing costs, however. Nyrstar’s profitability, meanwhile, would be boosted as the deal provides it with the working capital to operate smelters at full capacity.
Such is accounting alchemy. Like rival Swiss commodities trader Glencore, Trafigura faces increasing scrutiny over its corporate ethics globally. Saving Nyrstar would protect 4,000 jobs, it says. To do so it has doubled down on its zinc wager, and no matter what that means more risk for the trader.
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