Xstrata Credit-Default Swaps Diverge From Glencore After Merger

The cost of credit-default swaps insuring debt of Xstrata Plc is slumping amid speculation the contracts won’t cover new debt now the mining company has completed its merger with Glencore International Plc. (GLEN)

Swaps on Xstrata dropped for 13 of the past 14 trading days, falling 16 basis points today to a more than three-year low of 107 basis points. Contracts on Glencore rose 12 basis point to 172, driving the gap between them to the widest since November, according to data compiled by Bloomberg

Glencore Xstrata Plc, which after the $29 billion merger is the world’s fourth-biggest mining company, is raising new revolving credit facilities to replace existing credit lines. The Baar, Switzerland-based company has $51 billion of debt outstanding, according to data compiled by Bloomberg.

The reasons behind the move in Xstrata swaps “include the unwinding of loan hedging as Xstrata loans get refinanced and future bond issuance gets done out of a Glencore entity, which will combine to leave Xstrata CDS less liquid,” said Suki Mann, a strategist at Societe Generale SA in London. “We do not expect Xstrata CDS to be orphaned given that deliverable obligations will remain in place post merger.”

Orphaned credit-default swaps are contracts without underlying securities. A basis point on a credit-default swap protecting 10 million euros ($13 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.