Glencore to Sell Shares and Scrap Dividend to Reduce Debt

Glencore Xstrata Headquarters
Gianluca Colla/Bloomberg
  • Company will seek to cut debt by as much as $10.2 billion
  • Plans to sell about $2.5 billion of new shares and sell assets

Glencore Plc outlined a $10 billion debt-reduction plan less than three weeks after the commodity trader and miner said it was confident it could continue to pay a dividend to shareholders and preserve its credit rating.

The Swiss producer and trader of raw materials plans to sell about $2.5 billion in new shares and assets worth as much as $2 billion. The company will also suspend dividend payments as it seeks to reduce its $30 billion in debt. The stock rose as much as 13 percent, a record intraday gain, in London trading after last week falling the most since going public in 2011.

The debt plan represents an about-face for Glencore after Chief Financial Officer Steve Kalmin said less than three weeks ago that the company could “walk and chew gum,” meaning it could protect its credit rating and pay its dividend at the same time. The change of heart was prompted as investors expressed concerns about the balance after the company reported a 56 percent drop in first-half profit last month.

Balance Sheet

“It’s clear people want us to get the balance sheet in line with potentially lower commodity prices,” Chief Executive Officer Ivan Glasenberg said in a phone interview, commenting on meetings with investors. “This strengthens the balance sheet even if commodity prices go down further.”

Glencore Shares Tumble
Glencore Shares Tumble

Glencore has lost more than half its market value this year, and along with BHP Billiton Ltd. and Rio Tinto Group has seen profits slump as commodity prices plunged to touch a 16-year low last month. Standard & Poor’s cut Glencore’s outlook to negative from stable last week, saying weaker growth in China will weigh on copper and aluminum prices.

“This significantly improves the balance sheet of the company, it comfortably places Glencore in investment grade territory by rating agencies under most commodity scenarios,” Citigroup Inc. analyst Heath Jansen wrote in a note Monday. It “gives the company flexibility to weather any downcycle and is likely to remove the markets concern on the downside,” he said.

Glencore stock climbed 7 percent to close at 131.80 pence in London, paring this year’s decline to 56 percent. The shares slumped 17 percent last week. Bank of America Corp. raised its rating on the company to neutral after the plan was announced.

The cost of insuring Glencore’s senior debt against default fell. Credit-default swaps dropped to 325.66 basis points on Monday, from a more than three-year high of 445 basis points, according to data provider CMA.

Full Support

“We’ve spoken to some of our major shareholders and we have their full support” regarding a share sale, Glasenberg said in a phone interview.

The company may consider selling a minority stake in its agriculture unit as part of the plan, Kalmin said in a phone interview.

Morgan Stanley and Citigroup Inc. will underwrite 78 percent of the proposed share sale. Glasenberg, Kalmin and several board members will take up the remaining 22 percent, the company said in a statement Monday. Senior executives won’t dilute their holdings in the sale, Glasenberg said.

Glencore plans to save $1.6 billion by suspending its 2015 final dividend and a further $800 million by suspending its 2016 interim dividend.

Credit Rating

Net debt was $29.6 billion as of June 30, according to an Aug. 19 filing. It’s rated at BBB, the second-lowest investment grade, by S&P. Glencore said Monday it’s targeting a net debt figure in the “low $20s billion” by the end of next year and Kalmin said the company is sticking with an objective to retain the BBB rating from S&P.

"It’s a reasonably aggressive debt reduction," Michael Bush, head of credit research at National Australia Bank Ltd., said by phone from Melbourne after the statement was released. "Maybe they haven’t done quite enough to remove the negative outlook, but it certainly does reduce the pressure on their rating.”

Should weaker prices persist, other commodity suppliers will probably need to follow Glencore’s action to prioritize debt reduction, Bush said. “This will be the first of many such moves,” without a rally in raw materials prices, he said.

Copper Suspension

Glencore also said it had suspended copper production for 18 months from its Katanga operation in the Democratic Republic of Congo and its Mopani project in Zambia. The decision will remove about 400,000 metric tons of copper cathode from the market, Glencore said. Copper prices rose as much as 1.7 percent in London.

Euro-denominated bonds sold by Glencore surged to a two-week high. Its 1.25 billion euros of securities due March 2021 rose 4.35 cents on the euro to 92.28 cents, the highest since Aug. 19, according to data compiled by Bloomberg. The company’s 750 million euros of bonds due March 2025 climbed 5.68 cents to 85.15 cents, the data show.

The 750 million euros of notes maturing in September 2020 also increased, rising 4.1 cents to 103.8 cents.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.